TSXV:NNX Income Statement Sep 22nd 17
Could NNX's size and industry cause it to be more volatile?
NNX, with its market capitalisation of CAD $1.15M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, NNX 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 NNX’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How NNX's assets could affect its 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 NNX’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. NNX's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of NNX indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, NNX’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You may reap the gains of NNX's returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk.
Are you a potential investor? I recommend that you look into NNX's fundamental factors such as its current valuation and financial health as well. 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. NNX 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 Nickel North Exploration 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 Nickel North Exploration 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.