For Australian Whisky Holdings Limited’s (ASX:AWY) 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 AWY’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta 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 Australian Whisky Holdings

An interpretation of AWY’s beta

Australian Whisky Holdings’s beta of 0 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in AWY’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. AWY’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.

Does AWY’s size and industry impact the expected beta?

AWY, with its market capitalisation of AU$17.90M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, AWY’s industry, beverage, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap AWY but a low beta for the beverage industry. This is an interesting conclusion, since its size suggests AWY should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

Is AWY’s cost structure indicative of a high beta?

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test AWY’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, AWY seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of AWY indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what AWY’s actual beta value suggests, which is lower stock volatility relative to the market.