If you are looking to invest in United Engineers Limited’s (SGX:U04), 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 U04’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level 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.

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An interpretation of U04’s beta

United Engineers’s beta of 0.81 indicates that the company is less volatile relative to the diversified market portfolio. 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. U04’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 U04’s size and industry impact the expected beta?

A market capitalisation of S$1.61B puts U04 in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the construction industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap U04 but a low beta for the construction industry. This is an interesting conclusion, since both U04’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is U04’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 U04’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 that fixed assets make up less than a third of the company’s total assets, U04 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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.