If you are looking to invest in Kiadis Pharma NV.’s (ENXTAM:KDS), 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. Not every stock is exposed to the same level of market risk, and the broad market index represents a beta value 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.
See our latest analysis for Kiadis Pharma
What is KDS’s market risk?
Kiadis Pharma’s five-year beta of 1.95 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. According to this value of beta, KDS can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
How does KDS’s size and industry impact its risk?
KDS, with its market capitalisation of €210.40M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, KDS’s industry, biotechs, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap KDS but a low beta for the biotechs industry. This is an interesting conclusion, since its industry suggests KDS should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How KDS’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 test KDS’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, KDS doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect KDS 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. However, this is the opposite to what KDS’s actual beta value suggests, which is higher stock volatility relative to the market.