For Multistack International Limited’s (ASX:MSI) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as MSI. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.

Not all stocks are expose to the same level of market risk. A widely-used metric to measure a stock's market risk is beta, 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 MSI

An interpretation of MSI's beta

With a five-year beta of 0.16, Multistack International appears to be a less volatile company compared to the rest of the market. This means that the change in MSI's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. MSI’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.

Does MSI's size and industry impact the expected beta?

With a market cap of AUD $898.43K, MSI 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 capital goods industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap MSI but a low beta for the capital goods industry. It seems as though there is an inconsistency in risks portrayed by MSI’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Can MSI'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 examine MSI’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since MSI’s fixed assets are only 11.48% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect MSI 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 is consistent with is current beta value which also indicates low volatility.