If you are a shareholder in IGas Energy Plc’s (AIM:IGAS), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as IGAS. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Not every stock is exposed to the same level of market risk. The most widely used metric to quantify a stock’s market risk is beta, and the market as a whole represents a beta 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.
What does IGAS’s beta value mean?
With a five-year beta of 0.09, IGas Energy appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. IGAS’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. AIM:IGAS Income Statement Feb 14th 18
How does IGAS’s size and industry impact its risk?
With a market cap of UK£95.82M, IGAS falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, IGAS also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap IGAS but a low beta for the oil and gas industry. This is an interesting conclusion, since both IGAS’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How IGAS’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 examine IGAS’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. IGAS’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. Thus, we can expect IGAS to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts IGAS’s current beta value which indicates a below-average volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto IGAS. 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, IGAS may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether IGAS is a good investment for you, we also need to consider important company-specific fundamentals such as IGas Energy’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
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