If you are a shareholder in Capital VC Limited’s (SEHK:2324), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 2324 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. 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

Check out our latest analysis for Capital VC

What is 2324’s market risk?

With a beta of 1.95, Capital VC is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, 2324 may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.

Does 2324’s size and industry impact the expected beta?

A market capitalisation of HK$165.29M puts 2324 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, 2324 also operates in the capital markets 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 capital markets industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of 2324’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Is 2324’s cost structure indicative of a high 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 2324’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, 2324 seems to have a smaller dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts 2324’s current beta value which indicates an above-average volatility.