If you are a shareholder in IR Resources Limited’s (SEHK:8186), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures 8186’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

Check out our latest analysis for IR Resources

What does 8186’s beta value mean?

With a five-year beta of 0.43, IR Resources appears to be a less volatile company compared to the rest of the market. 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. 8186’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.

Does 8186’s size and industry impact the expected beta?

A market capitalisation of HK$65.67M puts 8186 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, 8186 also operates in the forestry industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the forestry industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by 8186’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.

Is 8186’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 8186’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, 8186 seems to have a smaller dependency on fixed costs to generate revenue. 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, 8186’s beta value conveys the same message.