For Libet SA.’s (WSE:LBT) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. LBT 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 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.
Check out our latest analysis for Libet
What does LBT’s beta value mean?
Libet’s beta of 0.4 indicates that the company is less volatile relative to the diversified market portfolio. 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, LBT appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does LBT’s size and industry impact the expected beta?
With a market cap of ZŁ63.50M, LBT falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the basic materials 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 basic materials industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both LBT’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How LBT’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 LBT’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%, LBT 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 LBT 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 LBT’s actual beta value suggests, which is lower stock volatility relative to the market.