For AJ Lucas Group Limited’s (ASX:AJL) 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. Different characteristics of a stock expose it to various levels 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 AJ Lucas Group

What does AJL’s beta value mean?

With a five-year beta of 0.53, AJ Lucas Group appears to be a less volatile company compared to the rest of the 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. AJL’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.

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

A market capitalisation of AUD A$210.67M puts AJL in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the construction and engineering industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the construction and engineering 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 AJL’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.

Can AJL’s asset-composition point to a higher 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 AJL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. AJL’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. As a result, this aspect of AJL indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts AJL’s current beta value which indicates a below-average volatility.