If you are a shareholder in Agricultural Land Trust’s (ASX:AGJ), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. AGJ 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. Not all stocks are expose to the same level 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.

Check out our latest analysis for Agricultural Land Trust

What does AGJ’s beta value mean?

Agricultural Land Trust’s beta of 0.05 indicates that the stock value will be less variable compared to the whole stock market. 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. AGJ’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 AGJ’s size and industry impact the expected beta?

AGJ, with its market capitalisation of AU$4.29M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, AGJ also operates in the reits industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the reits 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 AGJ’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 AGJ’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 test AGJ’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, AGJ appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of AGJ indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts AGJ’s current beta value which indicates a below-average volatility.

What this means for you:

You could benefit from lower risk during times of economic decline by holding onto AGJ. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, AGJ may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether AGJ is a good investment for you, we also need to consider important company-specific fundamentals such as Agricultural Land Trust’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Is AGJ’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

2. Past Track Record: Has AGJ been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of AGJ’s historicals for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.