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If you are looking to invest in Baumart Holdings Limited’s (ASX:BMH), 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. BMH 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. Not every stock is exposed 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.
View our latest analysis for Baumart Holdings
What is BMH’s market risk?
Baumart Holdings’s beta of 0.11 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in BMH’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, BMH 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 BMH’s size and industry impact its risk?
BMH, with its market capitalisation of AU$34.02M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, BMH’s industry, trade distributors, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap BMH but a low beta for the trade distributors industry. It seems as though there is an inconsistency in risks portrayed by BMH’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.
How BMH’s assets could affect its 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 BMH’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%, BMH 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 BMH 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. However, this is the opposite to what BMH’s actual beta value suggests, which is lower stock volatility relative to the market.