If you are looking to invest in Zylog Systems Limited’s (NSEI:ZYLOG), 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. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
View our latest analysis for Zylog Systems
What does ZYLOG’s beta value mean?
Zylog Systems’s beta of 0.53 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. ZYLOG’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Does ZYLOG’s size and industry impact the expected beta?
A market capitalisation of ₹128.01M puts ZYLOG in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the software 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 ZYLOG but a low beta for the software industry. It seems as though there is an inconsistency in risks portrayed by ZYLOG’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 ZYLOG’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 examine ZYLOG’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 that fixed assets make up less than a third of the company’s total assets, ZYLOG doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect ZYLOG to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. Similarly, ZYLOG’s beta value conveys the same message.