For PPK Group Limited’s (ASX:PPK) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. PPK 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.

Check out our latest analysis for PPK Group

What does PPK’s beta value mean?

With a five-year beta of 0.8, PPK Group appears to be a less volatile company compared to the rest of the market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, PPK appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

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

A market capitalisation of AU$14.26M puts PPK in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, PPK’s industry, machinery, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap PPK but a low beta for the machinery industry. It seems as though there is an inconsistency in risks portrayed by PPK’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How PPK’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 examine PPK’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, PPK appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect PPK 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 PPK’s current beta value which indicates a below-average volatility.