For Asia Coal Limited’s (SEHK:835) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures 835’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 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 835’s beta value mean?

Asia Coal’s beta of 0.32 indicates that the stock value will be less variable compared to the whole stock 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, 835 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Could 835’s size and industry cause it to be more volatile?

835, with its market capitalisation of HKD HK$538.03M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, 835 also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap 835 but a low beta for the oil and gas industry. This is an interesting conclusion, since both 835’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How 835’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 835’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, 835 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect 835 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. Similarly, 835’s beta value conveys the same message.

What this means for you:

Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto 835. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock. For more company-specific research on 835, check out our our free analysis plaform here.