For ATA Inc’s (NASDAQ:ATAI) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
An interpretation of ATAI’s beta
ATA’s five-year beta of 1.08 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, ATAI will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could ATAI’s size and industry cause it to be more volatile?
A market capitalisation of USD $97.52M puts ATAI in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the diversified consumer services industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the diversified consumer services industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of ATAI’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can ATAI’s asset-composition point to a higher 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 test ATAI’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since ATAI’s fixed assets are only 11.56% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect ATAI to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what ATAI’s actual beta value suggests, which is higher stock volatility relative to the market.
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. For next steps, take a look at ATAI’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.
Are you a potential investor? Before you buy ATAI, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. ATAI may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health. You can examine these factors in our free fundamental research report for ATAI here.
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.