If you are a shareholder in ClearOne Inc’s (NASDAQ:CLRO), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. CLRO 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. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole 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.

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An interpretation of CLRO’s beta

With a beta of 1.35, ClearOne is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, CLRO will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.

How does CLRO’s size and industry impact its risk?

CLRO, with its market capitalisation of USD $75.31M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, CLRO’s industry, communications, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of CLRO’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Can CLRO’s asset-composition point to a higher 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 CLRO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, CLRO seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of CLRO indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This is consistent with is current beta value which also indicates high volatility.

What this means for you:

Are you a shareholder? You may reap the gains of CLRO’s returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk. For next steps, take a look at CLRO’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.

Are you a potential investor? I recommend that you look into CLRO’s fundamental factors such as its current valuation and financial health as well. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. CLRO may be a great investment during times of economic growth. Continue your research on the stock with our free fundamental research report for CLRO 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.