Andhra Bank (NSE:ANDHRABANK): Risks You Need To Consider Before Buying

If you are a shareholder in Andhra Bank’s (NSEI:ANDHRABANK), 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 ANDHRABANK. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. 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. 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

See our latest analysis for Andhra Bank

What is ANDHRABANK’s market risk?

Andhra Bank’s beta of 0.82 indicates that the company is less volatile relative to the diversified market portfolio. 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. Based on this beta value, ANDHRABANK appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

NSEI:ANDHRABANK Income Statement Mar 1st 18
NSEI:ANDHRABANK Income Statement Mar 1st 18

Could ANDHRABANK’s size and industry cause it to be more volatile?

ANDHRABANK, with its market capitalisation of ₹39.28B, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, ANDHRABANK also operates in the banks 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 banks industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both ANDHRABANK’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

Is ANDHRABANK’s cost structure indicative of a high 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 ANDHRABANK’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in ANDHRABANK’s operations, it has low dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, ANDHRABANK’s beta value conveys the same message.

What this means for you:

You could benefit from lower risk during times of economic decline by holding onto ANDHRABANK. 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 ANDHRABANK is a good investment for you, we also need to consider important company-specific fundamentals such as Andhra Bank’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 ANDHRABANK’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 ANDHRABANK 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 ANDHRABANK’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.