If you are a shareholder in Parkson Retail Asia Limited’s (SGX:O9E), 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. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
View our latest analysis for Parkson Retail Asia
What is O9E’s market risk?
With a five-year beta of 0.74, Parkson Retail Asia 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. O9E’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 O9E’s size and industry impact its risk?
O9E, with its market capitalisation of S$39.96M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the multiline retail 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 O9E but a low beta for the multiline retail industry. This is an interesting conclusion, since both O9E’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How O9E’s assets could affect its 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 O9E’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. O9E’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect O9E to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts O9E’s current beta value which indicates a below-average volatility.