If you are looking to invest in Yellow Brick Road Holdings Limited’s (ASX:YBR), 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. YBR 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
Check out our latest analysis for Yellow Brick Road Holdings
An interpretation of YBR’s beta
With a five-year beta of 0.62, Yellow Brick Road Holdings appears to be a less volatile company compared to the rest of the market. 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. Based on this beta value, YBR appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does YBR’s size and industry impact the expected beta?
With a market cap of AU$39.49M, YBR falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, YBR’s industry, diversified financial, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap YBR but a low beta for the diversified financial industry. It seems as though there is an inconsistency in risks portrayed by YBR’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is YBR’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 YBR’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 an insignificant portion of total assets, YBR 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. Similarly, YBR’s beta value conveys the same message.