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Before You Buy DIRTT Environmental Solutions Ltd. (TSE:DRT), Consider Its Volatility

Simply Wall St

If you own shares in DIRTT Environmental Solutions Ltd. (TSE:DRT) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.

Some stocks are more sensitive to general market forces than others. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said 'volatility is far from synonymous with risk' in his 2014 letter to investors. So, while useful, beta is not the only metric to consider. To use beta as an investor, you must first understand that the overall market has a beta of one. A stock with a beta greater than one is more sensitive to broader market movements than a stock with a beta of less than one.

See our latest analysis for DIRTT Environmental Solutions

What DRT's beta value tells investors

Given that it has a beta of 1.55, we can surmise that the DIRTT Environmental Solutions share price has been fairly sensitive to market volatility (over the last 5 years). Based on this history, investors should be aware that DIRTT Environmental Solutions are likely to rise strongly in times of greed, but sell off in times of fear. Beta is worth considering, but it's also important to consider whether DIRTT Environmental Solutions is growing earnings and revenue. You can take a look for yourself, below.

TSX:DRT Income Statement, August 28th 2019

Does DRT's size influence the expected beta?

DIRTT Environmental Solutions is a noticeably small company, with a market capitalisation of CA$556m. Most companies this size are not always actively traded. Relatively few investors can influence the price of a smaller company, compared to a large company. This could explain the high beta value, in this case.

What this means for you:

Since DIRTT Environmental Solutions tends to moves up when the market is going up, and down when it's going down, potential investors may wish to reflect on the overall market, when considering the stock. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as DIRTT Environmental Solutions’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for DRT’s future growth? Take a look at our free research report of analyst consensus for DRT’s outlook.
  2. Past Track Record: Has DRT been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of DRT's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how DRT measures up against other companies on valuation. You could start with this free list of prospective options.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.