What You Must Know About Lombard Medical Inc’s (EVAR) Risks
For Lombard Medical Inc’s (NASDAQ:EVAR) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. EVAR 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 market as a whole represents a beta 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.
See our latest analysis for EVAR
What is EVAR’s market risk?
Lombard Medical has a beta of 1.74, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, EVAR 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.
Could EVAR's size and industry cause it to be more volatile?
With a market cap of USD $11.76M, EVAR falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, EVAR’s industry, healthcare equipment and supplies, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap EVAR but a low beta for the healthcare equipment and supplies industry. It seems as though there is an inconsistency in risks from EVAR’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is EVAR'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 EVAR’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, EVAR seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect EVAR 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. However, this is the opposite to what EVAR’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You may reap the gains of EVAR's returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into EVAR.
Are you a potential investor? Before you buy EVAR, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. EVAR may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health.
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 Lombard Medical 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 Lombard Medical 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.
