In This Article:
If you are a shareholder in Reckon Limited’s (ASX:RKN), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 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. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta value 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 are generally less volatile. See our latest analysis for Reckon
What does RKN’s beta value mean?
With a five-year beta of 0.88, Reckon appears to be a less volatile company compared to the rest of the market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. RKN’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 RKN’s size and industry impact the expected beta?
With a market cap of AU$99.86m, RKN falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, RKN’s industry, software, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap RKN. It seems as though there is an inconsistency in risks portrayed by RKN’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is RKN’s cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because high fixed costs increase the potential for operating leverage. I test RKN’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 less than a third of the company’s total assets, RKN doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect RKN 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. Similarly, RKN’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 RKN. 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 RKN is a good investment for you, we also need to consider important company-specific fundamentals such as Reckon’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following: