If you are a shareholder in Biostar Pharmaceuticals Inc’s (NASDAQ:BSPM), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of 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. Not all stocks are expose to the same level 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 BSPM’s beta
Biostar Pharmaceuticals’s five-year beta of 2.31 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, BSPM 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 BSPM’s size and industry impact its risk?
BSPM, with its market capitalisation of US$6.12M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Conversely, the company operates in the pharmaceuticals industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap BSPM but a low beta for the pharmaceuticals industry. This is an interesting conclusion, since its industry suggests BSPM should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is BSPM’s cost structure indicative of a high 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 BSPM’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, BSPM seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect BSPM 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 BSPM’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You could benefit from higher returns during times of economic growth by holding onto BSPM. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether BSPM is a good investment for you, we also need to consider important company-specific fundamentals such as Biostar Pharmaceuticals’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is BSPM’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has BSPM 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 BSPM’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks 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.