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For GSH Corporation Limited’s (SGX:BDX) 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 BDX’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose 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.
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An interpretation of BDX’s beta
With a five-year beta of 0.8, GSH appears to be a less volatile company compared to the rest of the market. This means that the change in BDX’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. Based on this beta value, BDX appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could BDX’s size and industry cause it to be more volatile?
BDX, with its market capitalisation of S$940.29M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the real estate industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap BDX but a low beta for the real estate industry. This is an interesting conclusion, since both BDX’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How BDX’s assets could affect its 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 BDX’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%, BDX 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 BDX 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 BDX’s actual beta value suggests, which is lower stock volatility relative to the market.