If you are looking to invest in DelMar Pharmaceuticals Inc’s (NASDAQ:DMPI), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. 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. 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.
What is DMPI’s market risk?
DelMar Pharmaceuticals’s beta of 0.81 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in DMPI’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. DMPI’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Does DMPI’s size and industry impact the expected beta?
DMPI, with its market capitalisation of USD $20.91M, is a small-cap stock, which generally have higher beta than similar companies of larger size. However, DMPI operates in the biotechnology industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of DMPI, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests DMPI should be more volatile than it actually is.
Is DMPI’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 DMPI’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up an insignificant portion of total assets, DMPI doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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, DMPI’s beta value conveys the same message.
What this means for you:
Are you a shareholder? DMPI may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as DMPI is valuable to lower your risk of market exposure, in particular, during times of economic decline. For more company-specific research on DMPI, check out our our free analysis plaform here.
Are you a potential investor? Before you buy DMPI, you should look at the stock in conjunction with their current portfolio holdings. DMPI may be a great cushion during times of economic downturns due to its low beta, but before leaping into the investment, I recommend taking into account its fundamentals as well. Continue your research on the stock with our free fundamental research report for DMPI 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.