Can Rentokil Initial plc (LON:RTO) Improve Your Portfolio Returns?
For Rentokil Initial plc’s (LSE:RTO) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. RTO 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 every stock is exposed to the same level of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
See our latest analysis for Rentokil Initial
An interpretation of RTO’s beta
Rentokil Initial’s beta of 0.41 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in RTO’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, RTO appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could RTO’s size and industry cause it to be more volatile?
A market capitalisation of GBP £5.39B puts RTO in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. But, RTO’s industry, commercial services, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors can expect a low beta associated with the size of RTO, but a higher beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from RTO’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How RTO’s assets could affect its 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 RTO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since RTO’s fixed assets are only 14.53% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, RTO’s beta value conveys the same message.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto RTO. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether RTO is a good investment for you, we also need to consider important company-specific fundamentals such as Rentokil Initial’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
1. Future Outlook: What are well-informed industry analysts predicting for RTO’s future growth? Take a look at our free research report of analyst consensus for RTO’s outlook.
2. Past Track Record: Has RTO 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 RTO’s historicals for more clarity.
3. 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.
