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.