For Dragon Group International Limited’s (SGX:MT1) 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 all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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.
See our latest analysis for Dragon Group International
What does MT1’s beta value mean?
With a five-year beta of 0.5, Dragon Group International appears to be a less volatile company compared to the rest of the market. This means that the change in MT1’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, MT1 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could MT1’s size and industry cause it to be more volatile?
MT1, with its market capitalisation of SGD SGD12.18M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, MT1 also operates in the electronic industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap MT1 but a low beta for the electronic industry. It seems as though there is an inconsistency in risks portrayed by MT1’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.
Can MT1’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test MT1’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%, MT1 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 MT1 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts MT1’s current beta value which indicates a below-average volatility.