For Auris Medical Holding AG’s (NASDAQ:EARS) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. EARS 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 market as a whole represents a beta 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 EARS’s beta
Auris Medical Holding’s beta of 0.78 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in EARS’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. Based on this beta value, EARS appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does EARS’s size and industry impact the expected beta?
A market capitalisation of US$7.83M puts EARS in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, EARS operates in the pharmaceuticals industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of EARS, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests EARS should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How EARS’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 EARS’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 that fixed assets make up less than a third of the company’s total assets, EARS doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto EARS. 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 EARS is a good investment for you, we also need to consider important company-specific fundamentals such as Auris Medical Holding’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is EARS’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 EARS 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 EARS’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.