If you are a shareholder in Earthport plc’s (AIM:EPO), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as EPO. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as EPO, because it is rare that an entire industry collapses at once. 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. The most widely used metric to quantify a stock’s market risk is beta, and the market as a whole represents a beta of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.Check out our latest analysis for Earthport
What is EPO’s market risk?
With a five-year beta of 0.46, Earthport appears to be a less volatile company compared to the rest of the market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. EPO’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does EPO’s size and industry impact its risk?
A market capitalisation of UK£54.74M puts EPO in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, EPO’s industry, it, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap EPO but a low beta for the it industry. This is an interesting conclusion, since both EPO’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can EPO’s asset-composition point to a higher 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 EPO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up an insignificant portion of total assets, EPO doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect EPO 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. Similarly, EPO’s beta value conveys the same message.
What this means for you:
You may reap the benefit of muted movements during times of economic decline by holding onto EPO. 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 EPO is a good investment for you, we also need to consider important company-specific fundamentals such as Earthport’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is EPO’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 EPO 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 EPO’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.