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For China Environmental Technology and Bioenergy Holdings Limited’s (SEHK:1237) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures 1237’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta 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.
View our latest analysis for China Environmental Technology and Bioenergy Holdings
What does 1237’s beta value mean?
China Environmental Technology and Bioenergy Holdings’s five-year beta of 1.36 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, 1237 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.
Could 1237’s size and industry cause it to be more volatile?
A market capitalisation of HK$750.47M puts 1237 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, 1237 also operates in the leisure 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 leisure industry, relative to those more well-established firms in a more defensive industry. This is consistent with 1237’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can 1237’s asset-composition point to a higher 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 1237’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%, 1237 seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of 1237 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This is consistent with is current beta value which also indicates high volatility.