For Yulong Eco-Materials Limited’s (NASDAQ:YECO) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact 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. 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 YECO’s beta
Yulong Eco-Materials’s five-year beta of 5.07 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, YECO can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Could YECO’s size and industry cause it to be more volatile?
With a market cap of US$7.47M, YECO falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, YECO also operates in the basic materials industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with YECO’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can YECO’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 test YECO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since YECO’s fixed assets are only 20.63% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect YECO 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. This outcome contradicts YECO’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of YECO’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into YECO. What I have not mentioned in my article here are important company-specific fundamentals such as Yulong Eco-Materials’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 YECO’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 YECO 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 YECO’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.