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For Texmaco Rail & Engineering Limited’s (NSEI:TEXRAIL) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact 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 every stock is exposed to the same level of market risk, and the broad market index 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 Texmaco Rail & Engineering
What does TEXRAIL’s beta value mean?
Texmaco Rail & Engineering’s beta of 0.27 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, TEXRAIL appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does TEXRAIL’s size and industry impact its risk?
With a market cap of ₹16.58B, TEXRAIL falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, TEXRAIL also operates in the machinery industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap TEXRAIL but a low beta for the machinery industry. This is an interesting conclusion, since both TEXRAIL’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How TEXRAIL’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 TEXRAIL’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%, TEXRAIL 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 TEXRAIL 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 outcome contradicts TEXRAIL’s current beta value which indicates a below-average volatility.