For Hong Kong Life Sciences and Technologies Group Limited’s (SEHK:8085) 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 every stock is exposed to the same level of market risk, and the broad market index represents a beta value 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.

Check out our latest analysis for Hong Kong Life Sciences and Technologies Group

An interpretation of 8085’s beta

Hong Kong Life Sciences and Technologies Group’s beta of 0.63 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in 8085’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. 8085’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.

How does 8085’s size and industry impact its risk?

8085, with its market capitalisation of HK$455.07M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, 8085 also operates in the trade distributors industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the trade distributors industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by 8085’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.

Can 8085’s asset-composition point to a higher 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 8085’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since 8085’s fixed assets are only 1.88% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect 8085 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, 8085’s beta value conveys the same message.