If you are looking to invest in Arowana International Limited’s (ASX:AWN), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. 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 every stock is exposed 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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An interpretation of AWN’s beta
Arowana International’s beta of 0.48 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in AWN’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, AWN appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could AWN’s size and industry cause it to be more volatile?
With a market cap of AU$61.69M, AWN falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, AWN’s industry, industrials, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap AWN but a low beta for the industrials industry. This is an interesting conclusion, since both AWN’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.
Is AWN’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 AWN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since AWN’s fixed assets are only 5.29% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, AWN’s beta value conveys the same message.