If you are looking to invest in Barrack St Investments Limited’s (ASX:BST), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. BST 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. Different characteristics of a stock expose it to various levels of market risk, and the broad market index 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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An interpretation of BST’s beta
Barrack St Investments’s beta of 0.3 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in BST’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. BST’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 BST’s size and industry impact the expected beta?
A market capitalisation of AU$16.49M puts BST in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, BST’s industry, capital markets, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap BST but a low beta for the capital markets industry. This is an interesting conclusion, since both BST’s size and industry indicates the stock should have a higher beta than it currently has.
Can BST’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 BST’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in BST’s operations, it has low dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, BST’s beta value conveys the same message.