If you are a shareholder in Fragrance Group Limited’s (SGX:F31), 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. Not every stock is exposed to the same level 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.
Check out our latest analysis for Fragrance Group
What is F31’s market risk?
Fragrance Group’s beta of 0.3 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, F31 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does F31’s size and industry impact the expected beta?
A market capitalisation of S$973.41M puts F31 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, F31 also operates in the real estate 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 real estate industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by F31’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.
Is F31’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 F31’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since F31’s fixed assets are only 25.95% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. 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. Similarly, F31’s beta value conveys the same message.