Can Elve SA. (ATH:ELBE) Improve Your Portfolio Returns?

For Elve SA.’s (ATSE:ELBE) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as ELBE. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as ELBE, because it is rare that an entire industry collapses at once. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.

Different characteristics of a stock expose it to various levels of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value 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.

What is ELBE’s market risk?

Elve’s beta of 0.2 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. ELBE's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.

How does ELBE's size and industry impact its risk?

A market capitalisation of €9.13M puts ELBE in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, ELBE’s industry, luxury, 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 ELBE but a low beta for the luxury industry. It seems as though there is an inconsistency in risks portrayed by ELBE’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Can ELBE's asset-composition point to a higher 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 ELBE’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, ELBE seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect ELBE to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts ELBE’s current beta value which indicates a below-average volatility.

What this means for you:

ELBE may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as ELBE is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether ELBE is a good investment for you, we also need to consider important company-specific fundamentals such as Elve’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Is ELBE’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 ELBE 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 ELBE'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.