If you are looking to invest in Seroja Investments Limited’s (SGX:IW5), 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. The beta measures IW5’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels 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.
See our latest analysis for Seroja Investments
What does IW5’s beta value mean?
Seroja Investments’s beta of 0.6 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in IW5’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. IW5’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does IW5’s size and industry impact its risk?
With a market cap of S$17.18M, IW5 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the shipping 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 shipping industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both IW5’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.
Can IW5’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 test IW5’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, IW5 seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect IW5 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 IW5’s current beta value which indicates a below-average volatility.