ASX:DRA Income Statement Oct 5th 17
Is DRA'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 DRA’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%, DRA appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect DRA to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts DRA’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto DRA. 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, DRA may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Before you buy DRA, you should look at the stock in conjunction with their current portfolio holdings. DRA may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping into the investment.
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 Dragon Mining 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 Dragon Mining 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.