If you are looking to invest in Chinese Food and Beverage Group Limited’s (SEHK:8272), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. 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 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.
Check out our latest analysis for Chinese Food and Beverage Group
What is 8272’s market risk?
Chinese Food and Beverage Group’s five-year beta of 3.56 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, 8272 may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Could 8272’s size and industry cause it to be more volatile?
With a market cap of HKD HK$57.06M, 8272 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, 8272’s industry, hospitality, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with 8272’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is 8272’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 8272’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, 8272 seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect 8272 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. This outcome contradicts 8272’s current beta value which indicates an above-average volatility.