If you are a shareholder in Polarcus Limited’s (OB:PLCS), 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 PLCS. 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.
Not every stock is exposed 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. 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.
What is PLCS’s market risk?
Polarcus’s five-year beta of 1.84 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, PLCS 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.
Does PLCS’s size and industry impact the expected beta?
A market capitalisation of US$1.17b puts PLCS in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, PLCS also operates in the energy services industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of PLCS’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How PLCS’s assets could affect its 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 examine PLCS’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%, PLCS 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 PLCS 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. Similarly, PLCS’s beta value conveys the same message.
What this means for you:
You could benefit from higher returns from PLCS during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. Though, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. In order to fully understand whether PLCS is a good investment for you, we also need to consider important company-specific fundamentals such as Polarcus’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for PLCS’s future growth? Take a look at our free research report of analyst consensus for PLCS’s outlook.
- Past Track Record: Has PLCS 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 PLCS’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.