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What Kind Of Risk And Return Should You Expect For Top Ships Inc (TOPS)?

If you are a shareholder in Top Ships Inc’s (NASDAQ:TOPS), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. TOPS 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

View our latest analysis for Top Ships

What is TOPS’s market risk?

Top Ships’s five-year beta of 1.32 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. Based on this beta value, TOPS 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 TOPS's size and industry impact its risk?

A market capitalisation of USD $4.15M puts TOPS in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, TOPS also operates in the oil, gas and consumable fuels 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 supports our interpretation of TOPS’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

NasdaqCM:TOPS Income Statement Oct 11th 17
NasdaqCM:TOPS Income Statement Oct 11th 17

Is TOPS's cost structure indicative of a high 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 TOPS’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. TOPS's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect TOPS to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This is consistent with is current beta value which also indicates high volatility.

What this means for you:

Are you a shareholder? You may reap the gains of TOPS's returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk.

Are you a potential investor? Before you buy TOPS, you should factor how your portfolio currently moves with the wider market, and where we are in the economic cycle. This stock could be an outperformer during times of growth, and it may be worth taking a deeper dive into the fundamentals to crystalize your thoughts on TOPS.

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 Top Ships 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 Top Ships 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.

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