If you are a shareholder in Ormester Vagyonvédelmi Nyrt’s (BUSE:ORMESTER), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as ORMESTER. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as ORMESTER, 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.
Not every stock is exposed 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.See our latest analysis for Ormester Vagyonvédelmi Nyrt
What does ORMESTER’s beta value mean?
Ormester Vagyonvédelmi Nyrt has a beta of 1.1, 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. According to this value of beta, ORMESTER can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
How does ORMESTER’s size and industry impact its risk?
With a market cap of FT236.45M, ORMESTER falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, ORMESTER also operates in the commercial services industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the commercial services industry, relative to those more well-established firms in a more defensive industry. This is consistent with ORMESTER’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is ORMESTER’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 examine ORMESTER’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, ORMESTER appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of ORMESTER indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This is consistent with is current beta value which also indicates high volatility.
What this means for you:
You may reap the gains of ORMESTER’s returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk. In order to fully understand whether ORMESTER is a good investment for you, we also need to consider important company-specific fundamentals such as Ormester Vagyonvédelmi Nyrt’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 ORMESTER’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.
- 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.