If you are looking to invest in Pennar Engineered Building Systems Limited’s (NSE:PENPEBS), 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. 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 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
View our latest analysis for Pennar Engineered Building Systems
What does PENPEBS’s beta value mean?
Pennar Engineered Building Systems’s beta of 0.90 indicates that the company has a history of less share price volatility than the broader market. This means that the change in PENPEBS’s value, whether it goes up or down, is expected to be smaller than the change in value of the entire stock market index. PENPEBS’s beta implies it may be a stock that investors with high-beta portfolios might find interesting, if they wanted to reduce their exposure to the risk that a broad market downturn negatively impacts their portfolio.
Could PENPEBS’s size and industry cause it to be more volatile?
A market capitalisation of ₹2.01b puts PENPEBS in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, PENPEBS also operates in the construction 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 construction 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 PENPEBS’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 PENPEBS’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 PENPEBS’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%, PENPEBS 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 PENPEBS 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 PENPEBS’s actual beta value suggests, which is lower stock volatility relative to the market.