How does TOM's size and industry impact its risk?
A market capitalisation of CAD $1.42M puts TOM in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, TOM also operates in the materials industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the materials industry, relative to those more well-established firms in a more defensive industry. This is consistent with TOM’s individual beta value we discussed above.
Is TOM's cost structure indicative of a high 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 TOM’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, TOM doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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 outcome contradicts TOM’s current beta value which indicates an above-average volatility.
What this means for you:
Are you a shareholder? You could benefit from higher returns during times of economic growth. However, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. It’s always wise to take into account your portfolio sensitivity to the market before you invest in TOM, as well as where we are in the current economic cycle.
Are you a potential investor? Before you buy TOM, you should look into its fundamental factors such as its current valuation and financial health. 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. TOM may be a great investment during times of economic growth.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Tolima Gold for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Tolima Gold anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass 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.