If you are a shareholder in Dottikon Es Holding AG’s (SWX:DESN), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. DESN 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 market as a whole represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
See our latest analysis for Dottikon Es Holding
An interpretation of DESN’s beta
Dottikon Es Holding’s beta of 0.46 indicates that the company is less volatile relative to the diversified market portfolio. 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. DESN’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.
Could DESN’s size and industry cause it to be more volatile?
A market capitalisation of CHF886.93M puts DESN in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, DESN also operates in the chemicals industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap DESN but a low beta for the chemicals industry. This is an interesting conclusion, since both DESN’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is DESN’s cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test DESN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. DESN’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 DESN 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 DESN’s current beta value which indicates a below-average volatility.