If you are a shareholder in 21Vianet Group Inc’s (NASDAQ:VNET), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. VNET 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. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

Check out our latest analysis for 21Vianet Group

An interpretation of VNET’s beta

21Vianet Group’s five-year beta of 1.72 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, VNET can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.

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

With a market cap of US$629.89M, VNET 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 internet industry, which has been found to have high sensitivity to market-wide shocks. 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 is consistent with VNET’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

How VNET’s assets could affect its 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 VNET’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 a fixed to total assets ratio of over 30%, VNET 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 VNET indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, VNET’s beta value conveys the same message.