What You Must Know About Bango PLC’s (AIM:BGO) Risks
For Bango PLC’s (AIM:BGO) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. BGO 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 broad market index represents a beta value 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.
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What is BGO’s market risk?
Bango's beta of 0.86 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in BGO'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, BGO appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does BGO's size and industry impact the expected beta?
A market capitalisation of GBP £170.06M puts BGO in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, BGO also operates in the software industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap BGO but a low beta for the software industry. It seems as though there is an inconsistency in risks portrayed by BGO’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is BGO'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 BGO’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, BGO doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect BGO 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 is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto BGO. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
Are you a potential investor? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail.
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 Bango 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 Bango 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.
