If you are a shareholder in KrisEnergy Ltd’s (SGX:SK3), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose to the same level of market risk, and the market as a whole 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.

See our latest analysis for KrisEnergy

What is SK3’s market risk?

KrisEnergy has a beta of 1.04, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, SK3 can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.

Could SK3’s size and industry cause it to be more volatile?

A market capitalisation of S$136.76M puts SK3 in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, SK3’s industry, oil and gas, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil and gas industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of SK3’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

How SK3’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 examine SK3’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, SK3 seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect SK3 to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This is consistent with is current beta value which also indicates high volatility.