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For Guangdong Tannery Limited’s (SEHK:1058) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 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 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 Guangdong Tannery
An interpretation of 1058’s beta
Guangdong Tannery’s beta of 0.55 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. 1058’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 1058’s size and industry impact the expected beta?
A market capitalisation of HK$414.27M puts 1058 in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, 1058’s industry, luxury, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the luxury industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by 1058’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.
Can 1058’s asset-composition point to a higher 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 1058’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. 1058’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of 1058 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts 1058’s current beta value which indicates a below-average volatility.