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What Kind Of Share Price Volatility Should You Expect For DIRTT Environmental Solutions Ltd. (TSE:DRT)?

Simply Wall St

If you own shares in DIRTT Environmental Solutions Ltd. (TSE:DRT) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.

Some stocks are more sensitive to general market forces than others. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that 'Volatility is far from synonymous with risk', beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. A stock with a beta below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.

View our latest analysis for DIRTT Environmental Solutions

What DRT's beta value tells investors

Zooming in on DIRTT Environmental Solutions, we see it has a five year beta of 1.94. This is above 1, so historically its share price has been influenced by the broader volatility of the stock market. Based on this history, investors should be aware that DIRTT Environmental Solutions are likely to rise strongly in times of greed, but sell off in times of fear. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see DIRTT Environmental Solutions's revenue and earnings in the image below.

TSX:DRT Income Statement May 28th 2020

Does DRT's size influence the expected beta?

DIRTT Environmental Solutions is a rather small company. It has a market capitalisation of CA$148m, which means it is probably under the radar of most investors. Relatively few investors can influence the price of a smaller company, compared to a large company. This could explain the high beta value, in this case.

What this means for you:

Since DIRTT Environmental Solutions tends to move up when the market is going up, and down when it's going down, potential investors may wish to reflect on the overall market, when considering the stock. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as DIRTT Environmental Solutions’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for DRT’s future growth? Take a look at our free research report of analyst consensus for DRT’s outlook.
  2. Past Track Record: Has DRT 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 DRT's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how DRT measures up against other companies on valuation. You could start with this free list of prospective options.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.