If you are a shareholder in FNG NV.’s (ENXTAM:FNG), 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 FNG. 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 other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Different characteristics of a stock expose it to various levels 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.See our latest analysis for FNG
An interpretation of FNG’s beta
With a five-year beta of 0.24, FNG appears to be a less volatile company compared to the rest of the 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. FNG’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 FNG’s size and industry impact its risk?
With a market cap of €239.66M, FNG falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the luxury industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap FNG but a low beta for the luxury industry. This is an interesting conclusion, since both FNG’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.
How FNG’s assets could affect its 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 FNG’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since FNG’s fixed assets are only 24.40% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. 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, FNG’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 FNG. 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 FNG is a good investment for you, we also need to consider important company-specific fundamentals such as FNG’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is FNG’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.