Should You Be Holding Bitauto Holdings Limited (BITA) Right Now?
If you are looking to invest in Bitauto Holdings Limited’s (NYSE:BITA), 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. BITA 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 every stock is exposed 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.
Check out our latest analysis for Bitauto Holdings
What is BITA’s market risk?
With a beta of 3.21, Bitauto Holdings is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, BITA will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
How does BITA's size and industry impact its risk?
A market capitalisation of USD ¥3.26B puts BITA in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. Conversely, the company operates in the internet software and services industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors can expect a low beta associated with the size of BITA, but a higher beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from BITA’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is BITA's cost structure indicative of a high 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 BITA’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since BITA’s fixed assets are only 0.53% 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 BITA 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 BITA’s current beta value which indicates an above-average volatility.
What this means for you:
Are you a shareholder? You could benefit from higher returns during times of economic growth by holding onto BITA. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into BITA.
Are you a potential investor? I recommend that you look into BITA's fundamental factors such as its current valuation and financial health. 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. BITA may be a great investment during times of economic growth.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Bitauto Holdings for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Bitauto Holdings anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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.
