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If you are looking to invest in Lexibook – Linguistic Electronic System Société anonyme’s (ENXTPA:ALLEX), 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. 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.
View our latest analysis for Lexibook – Linguistic Electronic System Société anonyme
An interpretation of ALLEX’s beta
Lexibook – Linguistic Electronic System Société anonyme’s five-year beta of 1.19 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, ALLEX will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
How does ALLEX’s size and industry impact its risk?
ALLEX, with its market capitalisation of €9.08M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, ALLEX’s industry, consumer durables, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of ALLEX’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can ALLEX’s asset-composition point to a higher 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 ALLEX’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, ALLEX seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect ALLEX 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. Similarly, ALLEX’s beta value conveys the same message.