If you are a shareholder in CosmoSteel Holdings Limited’s (SGX:B9S), 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. Different characteristics of a stock expose it to various levels 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.

Check out our latest analysis for CosmoSteel Holdings

What is B9S’s market risk?

CosmoSteel Holdings’s beta of 0.81 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. B9S’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.

How does B9S’s size and industry impact its risk?

B9S, with its market capitalisation of S$29.33M, 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. As a result, we should expect a high beta for the small-cap B9S but a low beta for the energy services industry. It seems as though there is an inconsistency in risks portrayed by B9S’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 B9S’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 B9S’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%, B9S 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 B9S indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what B9S’s actual beta value suggests, which is lower stock volatility relative to the market.