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Anyone researching Ardelyx, Inc. (NASDAQ:ARDX) might want to consider the historical volatility of the share price. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.
Some stocks are more sensitive to general market forces than others. Beta is a widely used metric to measure a stock's exposure to market risk (volatility). Before we go on, it's worth noting that Warren Buffett pointed out in his 2014 letter to shareholders that 'volatility is far from synonymous with risk.' Having said that, beta can still be rather useful. The first thing to understand about beta is that the beta of the overall market is 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.
What does ARDX's beta value mean to investors?
Given that it has a beta of 1.9, we can surmise that the Ardelyx share price has been fairly sensitive to market volatility (over the last 5 years). Based on this history, investors should be aware that Ardelyx are likely to rise strongly in times of greed, but sell off in times of fear. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see Ardelyx's revenue and earnings in the image below.
Does ARDX's size influence the expected beta?
Ardelyx is a noticeably small company, with a market capitalisation of US$161m. Most companies this size are not always actively traded. It has a relatively high beta, suggesting it is fairly actively traded for a company of its size. Because it takes less capital to move the share price of a small company like this, when a stock this size is actively traded it is quite often more sensitive to market volatility than similar large companies.
What this means for you:
Beta only tells us that the Ardelyx share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there's plenty more to learn. In order to fully understand whether ARDX is a good investment for you, we also need to consider important company-specific fundamentals such as Ardelyx’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ARDX’s future growth? Take a look at our free research report of analyst consensus for ARDX’s outlook.
- Past Track Record: Has ARDX 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 ARDX's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how ARDX 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 email@example.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.