If you are looking to invest in Perfectech International Holdings Limited’s (SEHK:765), 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 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.
See our latest analysis for Perfectech International Holdings
What does 765’s beta value mean?
Perfectech International Holdings’s beta of 0.74 indicates that the stock value will be less variable compared to the whole stock market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, 765 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could 765’s size and industry cause it to be more volatile?
765, with its market capitalisation of HK$460.96M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, 765’s industry, leisure, 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 765 but a low beta for the leisure industry. It seems as though there is an inconsistency in risks portrayed by 765’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How 765’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 765’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, 765 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 765 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts 765’s current beta value which indicates a below-average volatility.