ASX:IEC Income Statement Oct 2nd 17
Is IEC'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 IEC’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, IEC seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of IEC indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts IEC’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? IEC may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as IEC is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Before you buy IEC, you should look at the stock in conjunction with their current portfolio holdings. IEC 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 Intra Energy 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 Intra Energy 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.