One Thing To Consider Before Buying Phoenix Solar Aktiengesellschaft (ETR:PS4)
If you are a shareholder in Phoenix Solar Aktiengesellschaft’s (XTRA:PS4), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. PS4 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. Different characteristics of a stock expose it to various levels 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 Phoenix Solar
An interpretation of PS4’s beta
With a beta of 2.9, Phoenix Solar is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, PS4 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 PS4’s size and industry cause it to be more volatile?
With a market cap of €715.15K, PS4 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, PS4’s industry, semiconductor, 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 semiconductor industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of PS4’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can PS4’s asset-composition point to a higher 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 PS4’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since PS4’s fixed assets are only 20.48% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect PS4 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 PS4’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You could benefit from higher returns during times of economic growth by holding onto PS4. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as Phoenix Solar’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Financial Health: Is PS4’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has PS4 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 PS4’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks 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.
