If you are a shareholder in Sinwa Limited’s (SGX:5CN), 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 all stocks are expose to the same level of market risk, and the market as a whole 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 Sinwa

What is 5CN’s market risk?

Sinwa’s beta of 0.43 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in 5CN’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. Based on this beta value, 5CN appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Does 5CN’s size and industry impact the expected beta?

5CN, with its market capitalisation of SGD SGD81.86M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the infrastructure 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 5CN but a low beta for the infrastructure industry. It seems as though there is an inconsistency in risks portrayed by 5CN’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.

Is 5CN’s cost structure indicative of a high 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 5CN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, 5CN appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of 5CN indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts 5CN’s current beta value which indicates a below-average volatility.