If you are a shareholder in Polyard Petroleum International Group Limited’s (SEHK:8011), 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 8011’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 value 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 Polyard Petroleum International Group
An interpretation of 8011’s beta
With a five-year beta of 0.36, Polyard Petroleum International Group appears to be a less volatile company compared to the rest of the market. This means that the change in 8011’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, 8011 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does 8011’s size and industry impact the expected beta?
A market capitalisation of HK$710.88M puts 8011 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, 8011 also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap 8011 but a low beta for the oil and gas industry. It seems as though there is an inconsistency in risks portrayed by 8011’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.
Can 8011’s asset-composition point to a higher 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 8011’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up an insignificant portion of total assets, 8011 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect 8011 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. Similarly, 8011’s beta value conveys the same message.