If you are a shareholder in Webjet Limited’s (ASX:WEB), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. WEB 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. Not all stocks are expose to the same level of market risk, and the broad market index 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.
See our latest analysis for WEB
What does WEB's beta value mean?
Webjet’s beta of 0.73 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in WEB'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. WEB's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
How does WEB's size and industry impact its risk?
WEB, with its market capitalisation of AUD $1.26B, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, WEB’s industry, internet and direct marketing retail, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the internet and direct marketing retail industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both WEB’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is WEB's cost structure indicative of a high 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 test WEB’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, WEB seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect WEB to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. Similarly, WEB’s beta value conveys the same message.