For Marlin Global Limited’s (NZSE:MLN) 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 MLN. 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 every stock is exposed to the same level 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. 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 Marlin Global
An interpretation of MLN’s beta
Marlin Global’s beta of 0.22 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in MLN’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, MLN appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does MLN’s size and industry impact its risk?
MLN, with its market capitalisation of NZ$98.39M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, MLN’s industry, capital markets, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap MLN but a low beta for the capital markets industry. This is an interesting conclusion, since both MLN’s size and industry indicates the stock should have a higher beta than it currently has.
Is MLN’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 test MLN’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 MLN’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. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
MLN 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 MLN is valuable to lower your risk of market exposure, in particular, during times of economic decline. What I have not mentioned in my article here are important company-specific fundamentals such as Marlin Global’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is MLN’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 MLN 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 MLN’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.