If you are a shareholder in Innopac Holdings Limited’s (SGX:I26), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of 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. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

See our latest analysis for Innopac Holdings

What is I26’s market risk?

Innopac Holdings has a beta of 2.96, 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. According to this value of beta, I26 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.

Does I26’s size and industry impact the expected beta?

With a market cap of S$8.92M, I26 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, I26’s industry, capital markets, 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 I26’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Is I26’s cost structure indicative of a high 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 examine I26’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up an insignificant portion of total assets, I26 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect I26 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. This outcome contradicts I26’s current beta value which indicates an above-average volatility.