Does EIH Limited (NSE:EIHOTEL) Go Up With The Market?
If you are a shareholder in EIH Limited’s (NSEI:EIHOTEL), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. EIHOTEL 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 broad market index represents a beta value 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.
Check out our latest analysis for EIH
What is EIHOTEL’s market risk?
EIH’s beta of 0.82 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in EIHOTEL’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. EIHOTEL’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Does EIHOTEL’s size and industry impact the expected beta?
A market capitalisation of ₹98.11B puts EIHOTEL in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, EIHOTEL also operates in the hospitality 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 hospitality industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both EIHOTEL’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.
Is EIHOTEL’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 examine EIHOTEL’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. EIHOTEL’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of EIHOTEL indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts EIHOTEL’s current beta value which indicates a below-average volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto EIHOTEL. 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. Depending on the composition of your portfolio, EIHOTEL may be a valuable stock to hold onto in order to cushion the impact of a downturn. What I have not mentioned in my article here are important company-specific fundamentals such as EIH’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Financial Health: Is EIHOTEL’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.
Past Track Record: Has EIHOTEL 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 EIHOTEL’s historicals for more clarity.
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.