If you are a shareholder in FFP Société anonyme’s (ENXTPA:FFP), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. FFP 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 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 FFP Société anonyme
What does FFP’s beta value mean?
FFP Société anonyme has a beta of 1.24, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, FFP may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Could FFP’s size and industry cause it to be more volatile?
A market capitalisation of €2.41B puts FFP in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. Conversely, the company operates in the diversified financial industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a low beta for the large-cap nature of FFP but a higher beta for the diversified financial industry. It seems as though there is an inconsistency in risks from FFP’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is FFP’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 FFP’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, FFP 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 outcome contradicts FFP’s current beta value which indicates an above-average volatility.