Before You Buy Faron Pharmaceuticals Oy’s (LON:FARN), Consider This

If you are a shareholder in Faron Pharmaceuticals Oy’s (AIM:FARN), 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 FARN. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.

Not all stocks are expose to the same level 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 Faron Pharmaceuticals Oy

What does FARN’s beta value mean?

Faron Pharmaceuticals Oy has a beta of 1.04, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, FARN may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.

AIM:FARN Income Statement Jun 1st 18
AIM:FARN Income Statement Jun 1st 18

How does FARN’s size and industry impact its risk?

With a market cap of UK£35.84M, FARN falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Conversely, the company operates in the biotechs industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of FARN, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from FARN’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How FARN’s assets could affect its beta

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine FARN’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, FARN seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect FARN to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what FARN’s actual beta value suggests, which is higher stock volatility relative to the market.

What this means for you:

You could benefit from higher returns during times of economic growth by holding onto FARN. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether FARN is a good investment for you, we also need to consider important company-specific fundamentals such as Faron Pharmaceuticals Oy’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

  1. Financial Health: Is FARN’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.
  2. Past Track Record: Has FARN 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 FARN’s historicals for more clarity.
  3. 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.