If you are looking to invest in Melstar Information Technologies Limited’s (NSEI:MELSTAR), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. There are two types of risks that affect the market value of a listed company such as MELSTAR. 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.
Not all stocks are expose to the same level 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 our latest analysis for Melstar Information Technologies
What does MELSTAR’s beta value mean?
Melstar Information Technologies’s beta of 0.27 indicates that the stock value will be less variable compared to the whole stock market. 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. MELSTAR’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 MELSTAR’s size and industry impact its risk?
With a market cap of ₹46.42M, MELSTAR falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, MELSTAR also operates in the it industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap MELSTAR but a low beta for the it industry. This is an interesting conclusion, since both MELSTAR’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.
Is MELSTAR’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 MELSTAR’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. MELSTAR’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect MELSTAR 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 MELSTAR’s current beta value which indicates a below-average volatility.
What this means for you:
MELSTAR 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 MELSTAR is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether MELSTAR is a good investment for you, we also need to consider important company-specific fundamentals such as Melstar Information Technologies’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is MELSTAR’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 MELSTAR 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 MELSTAR’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.