For Village Roadshow Limited’s (ASX:VRL) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact 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 all stocks are expose to the same level of market risk, and the broad market index 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.
See our latest analysis for VRL
An interpretation of VRL's beta
With a five-year beta of 0.51, Village Roadshow appears to be a less volatile company compared to the rest of the market. This means that the change in VRL'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. VRL’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Does VRL's size and industry impact the expected beta?
A market capitalisation of AUD $631.21M puts VRL in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, VRL operates in the media industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap VRL but a low beta for the media industry. This is an interesting conclusion, since its size suggests VRL should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How VRL's assets could affect its beta
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine VRL’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. VRL's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of VRL indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what VRL’s actual beta value suggests, which is lower stock volatility relative to the market.