If you are a shareholder in Revoil SA’s (ATH:REVOIL), 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 REVOIL. 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 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 popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.View out our latest analysis for Revoil
An interpretation of REVOIL’s beta
Revoil’s beta of 0.96 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in REVOIL’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, REVOIL appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does REVOIL’s size and industry impact its risk?
A market capitalisation of €10.96m puts REVOIL in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, REVOIL’s industry, oil and gas, 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 REVOIL but a low beta for the oil and gas industry. It seems as though there is an inconsistency in risks portrayed by REVOIL’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 REVOIL’s cost structure indicative of a high 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 test REVOIL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, REVOIL appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect REVOIL 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. However, this is the opposite to what REVOIL’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto REVOIL. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, REVOIL may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether REVOIL is a good investment for you, we also need to consider important company-specific fundamentals such as Revoil’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 REVOIL’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 REVOIL 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 REVOIL’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.