If you are a shareholder in Orzel Spolka Akcyjna’s (WSE:ORL), 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 ORL. 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.
Different characteristics of a stock expose it to various levels 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.See our latest analysis for Orzel Spolka Akcyjna
What is ORL’s market risk?
Orzel Spolka Akcyjna’s beta of 0.22 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, ORL appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could ORL’s size and industry cause it to be more volatile?
ORL, with its market capitalisation of ZŁ2.36M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, ORL also operates in the chemicals industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap ORL but a low beta for the chemicals industry. It seems as though there is an inconsistency in risks portrayed by ORL’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can ORL’s asset-composition point to a higher 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 ORL’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, ORL seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of ORL indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts ORL’s current beta value which indicates a below-average volatility.
What this means for you:
ORL 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 ORL is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether ORL is a good investment for you, we also need to consider important company-specific fundamentals such as Orzel Spolka Akcyjna’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 ORL’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 ORL 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 ORL’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.