For Transcendence Technologies Limited’s (ASX:TTL) 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 TTL’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. 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 Transcendence Technologies

An interpretation of TTL’s beta

Transcendence Technologies’s beta of 0.65 indicates that the stock value will be less variable compared to the whole stock market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, TTL appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Could TTL’s size and industry cause it to be more volatile?

With a market cap of AUD A$4.34M, TTL falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, TTL’s industry, software, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap TTL but a low beta for the software industry. It seems as though there is an inconsistency in risks portrayed by TTL’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 TTL’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 TTL’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, TTL 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. Similarly, TTL’s beta value conveys the same message.