If you are looking to invest in China Sports International Limited’s (SGX:FQ8), 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. FQ8 is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Different characteristics of a stock expose it to various levels 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.
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An interpretation of FQ8’s beta
China Sports International has a beta of 1.78, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, FQ8 may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Could FQ8’s size and industry cause it to be more volatile?
With a market cap of SGD SGD12.69M, FQ8 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, FQ8’s industry, luxury, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of FQ8’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How FQ8’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 test FQ8’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since FQ8’s fixed assets are only 18.52% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. However, this is the opposite to what FQ8’s actual beta value suggests, which is higher stock volatility relative to the market.