If you are looking to invest in China Sports International Limited’s (SGX:FQ8), 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. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the broad market index 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.
See our latest analysis for China Sports International
What is FQ8’s market risk?
China Sports International has a beta of 1.66, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, FQ8 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 FQ8’s size and industry impact the expected beta?
A market capitalisation of S$12.69M puts FQ8 in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, FQ8’s industry, luxury, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with FQ8’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How FQ8’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 FQ8’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, FQ8 seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect FQ8 to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what FQ8’s actual beta value suggests, which is higher stock volatility relative to the market.