If you are looking to invest in Lateral Corporation Limited’s (NZSE:LAT), 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. LAT is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and 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.
View our latest analysis for Lateral
What is LAT’s market risk?
Lateral's beta of 0.89 indicates that the stock value will be less variable compared to the whole stock 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. Based on this beta value, LAT appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does LAT's size and industry impact its risk?
LAT, with its market capitalisation of NZD $2.57M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the internet software and services industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the internet software and services industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both LAT’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.
How LAT's assets could affect its 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 test LAT’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since LAT’s fixed assets are only 0.40% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect LAT to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.