Yahoo Finance How Should You Think About Phoslock Water Solutions Limited’s (ASX:PHK) Risks?
If you are a shareholder in Phoslock Water Solutions Limited’s (ASX:PHK), 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 all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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.
See our latest analysis for Phoslock Water Solutions
What is PHK’s market risk?
Phoslock Water Solutions’s beta of 0.4 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in PHK’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. Based on this beta value, PHK appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does PHK’s size and industry impact its risk?
PHK, with its market capitalisation of AU$154.18M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, PHK’s industry, commercial services, 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 PHK but a low beta for the commercial services industry. This is an interesting conclusion, since both PHK’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 PHK’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 test PHK’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, PHK seems to have a smaller dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You may reap the benefit of muted movements during times of economic decline by holding onto PHK. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. What I have not mentioned in my article here are important company-specific fundamentals such as Phoslock Water Solutions’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Financial Health: Is PHK’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has PHK been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of PHK’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.