If you are a shareholder in Vmoto Limited’s (ASX:VMT), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. VMT is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and 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. 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.

View our latest analysis for Vmoto

An interpretation of VMT’s beta

Vmoto’s beta of 0.26 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in VMT’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, VMT appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

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

With a market cap of AUD A$10.21M, VMT falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the auto industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap VMT but a low beta for the auto industry. It seems as though there is an inconsistency in risks portrayed by VMT’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

How VMT’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 VMT’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, VMT 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 VMT 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 VMT’s actual beta value suggests, which is lower stock volatility relative to the market.

What this means for you:

Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto VMT. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, VMT may be a valuable stock to hold onto in order to cushion the impact of a downturn. For next steps, take a look at VMT’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.

Are you a potential investor? Depending on the composition of your portfolio, VMT may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in VMT, as well as where we are in the current economic cycle. Continue your research on the stock with our free fundamental research report for VMT here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.