If you are looking to invest in ATA Inc’s (NASDAQ:ATAI), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Broadly speaking, there are two types of risk you should consider when investing in stocks such as ATAI. 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 risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Not every stock is exposed to the same level of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value 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 does ATAI's beta value mean?
With a beta of 1.25, ATA 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.According to this value of beta,ATAI can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Could ATAI's size and industry cause it to be more volatile?
A market capitalisation of USD $105.76M puts ATAI in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, ATAI also operates in the consumer services 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 X industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of ATAI’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
How ATAI's assets could affect its beta
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive.I examine ATAI’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint.Considering fixed assets account for less than a third of the company's overall assets, ATAI seems to have a smaller dependency on fixed costs to generate revenue.As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts ATAI’s current beta value which indicates an above-average volatility.
What this means for you:
Are you a shareholder? You may reap the gains of ATAI's returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into ATAI.
Are you a potential investor? I recommend that you look into ATAI's fundamental factors such as its current valuation and financial health. 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. ATAI 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 ATA 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 ATA 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.