All You Need To Know About AdCare Health Systems Inc’s (ADK) Risks
For AdCare Health Systems Inc’s (AMEX:ADK) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as ADK. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not all stocks are expose to the same level of market risk. The most widely used metric to quantify a stock's market risk is beta, 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.
See our latest analysis for ADK
An interpretation of ADK's beta
AdCare Health Systems’s beta of 0.95 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. ADK’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Does ADK's size and industry impact the expected beta?
With a market cap of USD $19.56M, ADK falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, ADK operates in the healthcare equipment and services industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap ADK but a low beta for the X industry. It seems as though there is an inconsistency in risks from ADK’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is ADK'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 test ADK’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. ADK'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 ADK 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. However, this is the opposite to what ADK’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? ADK may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as ADK is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Depending on the composition of your portfolio, ADK may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in ADK, as well as where we are in the current economic cycle.
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 AdCare Health Systems 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 AdCare Health Systems 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.
