For Prosafe SE’s (OB:PRS) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of PRS. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce 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 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. 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 Prosafe
What is PRS’s market risk?
Prosafe’s beta of 0.94 indicates that the company is less volatile relative to the diversified market portfolio. 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. PRS’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Does PRS’s size and industry impact the expected beta?
PRS, with its market capitalisation of ØRE1.02B, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, PRS’s industry, energy services, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the energy services industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by PRS’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How PRS’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 test PRS’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, PRS 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 PRS indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts PRS’s current beta value which indicates a below-average volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto PRS. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, PRS may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether PRS is a good investment for you, we also need to consider important company-specific fundamentals such as Prosafe’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for PRS’s future growth? Take a look at our free research report of analyst consensus for PRS’s outlook.
- Past Track Record: Has PRS 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 PRS’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.