If you are looking to invest in Elecnor SA.’s (BME:ENO), 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. ENO is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not all stocks are expose to the same level of market risk, and the broad market index 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.
An interpretation of ENO’s beta
Elecnor’s beta of 0.56 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in ENO’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. ENO’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does ENO’s size and industry impact its risk?
ENO, with its market capitalisation of €1.13B, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the construction industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap ENO but a low beta for the construction industry. It seems as though there is an inconsistency in risks portrayed by ENO’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can ENO’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 examine ENO’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, ENO seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of ENO indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts ENO’s current beta value which indicates a below-average volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto ENO. 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. Depending on the composition of your portfolio, ENO may be a valuable stock to hold onto in order to cushion the impact of a downturn. What I have not mentioned in my article here are important company-specific fundamentals such as Elecnor’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is ENO’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 ENO 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 ENO’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.