For Site Group International Limited’s (ASX:SIT) 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. 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 SIT

An interpretation of SIT's beta

Site Group International's beta of 0.47 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. SIT’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.

Could SIT's size and industry cause it to be more volatile?

SIT, with its market capitalisation of AUD $23.54M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the diversified consumer services 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 SIT but a low beta for the diversified consumer services industry. It seems as though there is an inconsistency in risks portrayed by SIT’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.

Is SIT'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 test SIT’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. SIT's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect SIT 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 SIT’s current beta value which indicates a below-average volatility.