If you are a shareholder in Norman Broadbent Plc’s (LON:NBB), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of NBB. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as NBB, because it is rare that an entire industry collapses at once. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Different characteristics of a stock expose it to various levels of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.Check out our latest analysis for Norman Broadbent
What does NBB’s beta value mean?
Norman Broadbent’s beta of 0.91 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, NBB appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could NBB’s size and industry cause it to be more volatile?
With a market cap of UK£5.66m, NBB falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the professional services industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the professional services industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by NBB’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is NBB’s cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test NBB’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since NBB’s fixed assets are only 1.06% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You may reap the benefit of muted movements during times of economic decline by holding onto NBB. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. In order to fully understand whether NBB is a good investment for you, we also need to consider important company-specific fundamentals such as Norman Broadbent’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is NBB’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has NBB been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of NBB’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.