What You Must Know About Ess Dee Aluminium Limited’s (NSE:ESSDEE) Risks
If you are a shareholder in Ess Dee Aluminium Limited’s (NSEI:ESSDEE), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose to the same level of market risk, and the market as a whole 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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An interpretation of ESSDEE’s beta
Ess Dee Aluminium’s beta of 0.89 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. ESSDEE’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could ESSDEE’s size and industry cause it to be more volatile?
A market capitalisation of INR ₹2.12B puts ESSDEE in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, ESSDEE’s industry, packaging, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the packaging industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by ESSDEE’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is ESSDEE’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 ESSDEE’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. ESSDEE’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. As a result, this aspect of ESSDEE indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what ESSDEE’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto ESSDEE. 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. Depending on the composition of your portfolio, ESSDEE may be a valuable stock to hold onto in order to cushion the impact of a downturn. For more company-specific research on ESSDEE, check out our our free analysis plaform here.
Are you a potential investor? Before you buy ESSDEE, you should look at the stock in conjunction with their current portfolio holdings. ESSDEE may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping into the investment. Continue your research on the stock with our free fundamental research report for ESSDEE here.
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.
