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If you are looking to invest in Paramount Communications Limited’s (NSEI:PARACABLES), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. The beta measures PARACABLES’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the broad market index 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.
Check out our latest analysis for Paramount Communications
What is PARACABLES’s market risk?
With a five-year beta of 0.31, Paramount Communications appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. PARACABLES’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Does PARACABLES’s size and industry impact the expected beta?
With a market cap of ₹1.88B, PARACABLES 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 electrical 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 electrical industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by PARACABLES’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How PARACABLES’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 PARACABLES’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%, PARACABLES seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect PARACABLES to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. However, this is the opposite to what PARACABLES’s actual beta value suggests, which is lower stock volatility relative to the market.