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.

What this means for you:

You may reap the benefit of muted movements during times of economic decline by holding onto PYDS. 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 Payment Data Systems’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

1. Financial Health: Is PYDS’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.

2. Past Track Record: Has PYDS 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 PYDS’s historicals for more clarity.

3. 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.