If you are a shareholder in Akers Biosciences Inc’s (AIM:AKR), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as AKR. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
Different characteristics of a stock expose it to various levels of market risk. The most widely used metric to quantify a stock's market risk is beta, and the market as a whole represents a beta of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
What is AKR’s market risk?
With a beta of 2.21, Akers Biosciences is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, AKR may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
How does AKR's size and industry impact its risk?
With a market cap of GBP £6.68M, AKR falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, AKR operates in the healthcare equipment and services industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of AKR, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests AKR should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can AKR's asset-composition point to a higher 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 AKR’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. AKR'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 AKR indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, AKR’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You may reap the gains of AKR'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 AKR'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. AKR 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 Akers Biosciences 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 Akers Biosciences 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.