How Does Kandi Technologies Group Inc (NASDAQ:KNDI) Affect Your Portfolio Returns?

If you are looking to invest in Kandi Technologies Group Inc’s (NASDAQ:KNDI), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. There are two types of risks that affect the market value of a listed company such as KNDI. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as KNDI, because it is rare that an entire industry collapses at once. 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.

What is KNDI’s market risk?

Kandi Technologies Group has a beta of 2.77, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, KNDI will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.

Could KNDI's size and industry cause it to be more volatile?

KNDI, with its market capitalisation of US$253.39M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the auto components industry, which has been found to have high sensitivity 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 KNDI’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

Is KNDI'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 KNDI’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since KNDI’s fixed assets are only 17.08% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect KNDI to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what KNDI’s actual beta value suggests, which is higher stock volatility relative to the market.

What this means for you:

You may reap the gains of KNDI's returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into KNDI. In order to fully understand whether KNDI is a good investment for you, we also need to consider important company-specific fundamentals such as Kandi Technologies Group’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Is KNDI’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.
2. Past Track Record: Has KNDI 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 KNDI's historicals for more clarity.
3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.