For LS telcom AG’s (XTRA:LSX) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures LSX’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value 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.

Check out our latest analysis for LS telcom

What does LSX’s beta value mean?

LS telcom’s beta of 0.61 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in LSX’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, LSX appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Does LSX’s size and industry impact the expected beta?

A market capitalisation of €33.99M puts LSX in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, LSX’s industry, software, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the software industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both LSX’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 LSX’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 examine LSX’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 that fixed assets make up less than a third of the company’s total assets, LSX doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect LSX 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 LSX. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. In order to fully understand whether LSX is a good investment for you, we also need to consider important company-specific fundamentals such as LS telcom’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 LSX’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 LSX 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 LSX’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.