For Huan Hsin Holdings Ltd’s (SGX:H16) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures H16’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, and the market as a whole 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.
See our latest analysis for Huan Hsin Holdings
What does H16’s beta value mean?
With a five-year beta of 0, Huan Hsin Holdings appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, H16 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does H16’s size and industry impact the expected beta?
With a market cap of S$10.40M, H16 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, H16 also operates in the electronic 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 electronic 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 H16’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.
How H16’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 examine H16’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, H16 appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of H16 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts H16’s current beta value which indicates a below-average volatility.