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If you are a shareholder in Carlton Investments Limited’s (ASX:CIN), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the broad market index 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 Carlton Investments
What is CIN’s market risk?
Carlton Investments’s beta of 0.47 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in CIN’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, CIN appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could CIN’s size and industry cause it to be more volatile?
With a market cap of AU$857.78M, CIN falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, CIN also operates in the capital markets industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap CIN but a low beta for the capital markets industry. It seems as though there is an inconsistency in risks portrayed by CIN’s size and industry relative to its actual beta value.
How CIN’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 test CIN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up an insignificant portion of total assets, CIN doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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 is consistent with is current beta value which also indicates low volatility.