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For Sunmoon Food Company Limited’s (SGX:AAJ) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. AAJ 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. 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.
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What does AAJ’s beta value mean?
Sunmoon Food’s beta of 1 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. AAJ’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.
Could AAJ’s size and industry cause it to be more volatile?
A market capitalisation of S$43.90M puts AAJ in the category of small-cap stocks, which tends to possess higher beta than larger companies. Conversely, the company operates in the consumer retailing industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of AAJ, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests AAJ should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How AAJ’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 test AAJ’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since AAJ’s fixed assets are only 8.40% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This is consistent with is current beta value which also indicates low volatility.