ASX:IRD Income Statement Sep 9th 17
Does IRD's size and industry impact the expected beta?
A market capitalisation of AUD $128.74M puts IRD in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, IRD also operates in the materials industry, which has commonly demonstrated strong reactions to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of IRD’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is IRD'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 examine IRD’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint.With a fixed-assets-to-total-assets ratio of greater than 30%, IRD appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice.As a result, this aspect of IRD indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This is consistent with is current beta value which also indicates high volatility.
What this means for you:
Are you a shareholder? You may reap the gains of IRD'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? Before you buy IRD, you should factor how your portfolio currently moves with the wider market, and where we are in the economic cycle. This stock could be an outperformer during times of growth, and it may be worth taking a deeper dive into the fundamentals to crystalize your thoughts on IRD.
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 Iron Road 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 Iron Road 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.