For Payment Data Systems Inc’s (NASDAQ:PYDS) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. PYDS 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. 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.
Check out our latest analysis for Payment Data Systems
An interpretation of PYDS’s beta
With a five-year beta of 0.77, Payment Data Systems appears to be a less volatile company compared to the rest of the market. This means that the change in PYDS’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. PYDS’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.
Does PYDS’s size and industry impact the expected beta?
A market capitalisation of US$26.49M puts PYDS in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, PYDS also operates in the it industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the it industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both PYDS’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.
How PYDS’s assets could affect its 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 examine PYDS’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, PYDS seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect PYDS 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. This is consistent with is current beta value which also indicates low volatility.