If you are a shareholder in Equatorial Palm Oil plc’s (AIM:PAL), 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 every stock is exposed to the same level of market risk, and the market as a whole represents a beta value 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.
What does PAL’s beta value mean?
Equatorial Palm Oil’s beta of 0.78 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in PAL’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. PAL’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.
Could PAL’s size and industry cause it to be more volatile?
A market capitalisation of UK£7.48M puts PAL in the category of small-cap stocks, which tends to possess higher beta than larger companies. But, PAL’s industry, food, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap PAL but a low beta for the food industry. It seems as though there is an inconsistency in risks from PAL’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How PAL’s assets could affect its beta
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine PAL’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 is virtually non-existent in PAL’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect PAL 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. Similarly, PAL’s beta value conveys the same message.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto PAL. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as Equatorial Palm Oil’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is PAL’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 PAL 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 PAL’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.