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For Ukrproduct Group Limited’s (AIM:UKR) 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. Not all stocks are expose to the same level of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
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What does UKR’s beta value mean?
Ukrproduct Group’s beta of 0.44 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in UKR’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. UKR’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 UKR’s size and industry impact the expected beta?
With a market cap of UK£1.79M, UKR falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, UKR operates in the food industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of UKR, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests UKR should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is UKR’s cost structure indicative of a high 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 UKR’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, UKR 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 UKR indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts UKR’s current beta value which indicates a below-average volatility.