For Ookami Limited’s (ASX:OOK) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. OOK 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 every stock is exposed to the same level of market risk, and the market as a whole 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.
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An interpretation of OOK’s beta
Ookami has a beta of 4.23, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, OOK will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Does OOK’s size and industry impact the expected beta?
OOK, with its market capitalisation of AU$11.96M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, OOK also operates in the internet 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 internet industry, relative to those more well-established firms in a more defensive industry. This is consistent with OOK’s individual beta value we discussed above.
Is OOK’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 OOK’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, OOK doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect OOK 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 outcome contradicts OOK’s current beta value which indicates an above-average volatility.