For Water Resources Group Limited’s (ASX:WRG) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. WRG 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 every stock is exposed to the same level of market risk, and the market as a whole represents a beta 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 WRG
What does WRG's beta value mean?
With a five-year beta of 0.28, Water Resources Group appears to be a less volatile company compared to the rest of the 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, WRG appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does WRG's size and industry impact its risk?
A market capitalisation of AUD $4.18M puts WRG in the category of small-cap stocks, which tends to possess higher beta than larger companies. But, WRG’s industry, water utilities, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap WRG but a low beta for the water utilities industry. This is an interesting conclusion, since its size suggests WRG should be more volatile than it actually is.
How WRG'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 test WRG’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, WRG seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect WRG 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 is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto WRG. 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, WRG may be a valuable stock to hold onto in order to cushion the impact of a downturn.