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For Mermaid Maritime Public Company Limited’s (SGX:DU4) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. DU4 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. Different characteristics of a stock expose it to various levels 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 Mermaid Maritime
What is DU4’s market risk?
With a beta of 1.39, Mermaid Maritime is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, DU4 will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
How does DU4’s size and industry impact its risk?
DU4, with its market capitalisation of S$185.15M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the energy services 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 energy services industry, relative to those more well-established firms in a more defensive industry. This is consistent with DU4’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can DU4’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 test DU4’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%, DU4 seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of DU4 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, DU4’s beta value conveys the same message.