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If you are a shareholder in Tecnotree Oyj’s (HLSE:TEM1V), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures TEM1V’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 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 Tecnotree Oyj
What does TEM1V’s beta value mean?
Tecnotree Oyj has a beta of 1.01, 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, TEM1V 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.
Could TEM1V’s size and industry cause it to be more volatile?
With a market cap of €9.81M, TEM1V falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the software industry, which has been found to have high sensitivity to market-wide shocks. 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 consistent with TEM1V’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
How TEM1V’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 TEM1V’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, TEM1V seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect TEM1V 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 outcome contradicts TEM1V’s current beta value which indicates an above-average volatility.