Fauji Fertilizers Company has been a leading fertilizer producer in Pakistan.
Being one of the
oldest fertilizer producers in the country it has been relatively financially stable. Below we will present you some of the key financial measures that highlight the riskiness and return of the company. These tools aid the management in immediate and long term future and general contingency planning. Considering the performance horizon of FFC of the past five years, FFCs average daily returns are very less compared to that of the market during the five-year period. Fauji Fertilizers had a return of only 0.015% as compared to markets 0.09% approx. From an investors point of view, especially one inclined towards quick yielding stocks, the Fauji Fertilizer stocks were not a good option since the average daily returns throughout the concerned period were negligible. Comparison of standard deviations of FFCs stock and KSE 100 index should shed light on the relative volatility of FFCs stock. The standard deviation of FFCs stock is nearly twice that of the market making it more volatile .Keeping in mind the theoretical assumption of risk aversion it could be said that to an average investor FFCs stock is less attractive. However, there are numerous players in the stock market that seek high returns and are both willing and able to compromise on relatively higher level of risk to in order to maximize short term return. As we have seen earlier however that average returns of FFC are fairly lower which would dilute the interest of investors willing to opt for this relatively risky investment. While computing the risk for Fauji Fertilizers in relation to the market, it seems that FFC is not very reactive to market changes. This is further reinforced by the beta figures for Fauji Fertilizer stock of only 0.293 so we can analyze that FFCs stocks are not much affected by changing market prices on average because beta shows that for every Rs.1 change in the market, Fauji Fertilizer will only be affected by Rs. 0.3. This low beta can be due to a lot of reasons. The decrease in dividend payout ratio, resulted in decreasing returns and also the slight decrease in the stock prices of Fauji Fertilizers. The low beta figure signifies low sensitivity of the stock compared to the market, i.e. FFcs stock position has been defensive for over some time period. The beta of 0.293 means that as returns on market increases, FFC returns are forecasted to increase less than the market. Thus, FFC stocks are less sensitive to the changing marketing trends. This in part can be attributed to the fact that fertilizer is a sector of necessity since it boosts agricultural productivity and supports the production of agricultural products necessary for survival, therefore, even if economic conditions change, affecting market as a whole, fertilizers stocks would be affected by a much lesser degree, since demand for fertilizers is not determined by economic conditions by large. Therefore, if market prices increase or decrease by 10% only about 2.93% change in FFC stock indices was expected, signifying although a positive relationship with the market, but a weak one. This is fairly obvious after computation of correlation coefficient of 0.15 of FFC and KSE100 daily return. It is recommended for investors to keep FFCs stock as a component of their portfolio with an objective of diluting the effect of other more risky stocks with higher beta. Concluding, the above analysis explains the riskiness and volatility of FFCs stocks in relative to the market average returns and risk, signifying, that FFC stocks result in less daily returns on average as compared to the stock market and are less relative volatile as portrayed by a beta value of less than 1. With the trend of the market of producing low returns on average it could be speculated that despite the higher deviation of FFCs stock investors might still be keen to keep a low beta stock such as this as part of their portfolios.