If you are looking to invest in YPB Group Limited’s (ASX:YPB), 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. The beta measures YPB’s exposure to the wider market risk, which reflects changes in economic and political factors. 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 YPB Group

An interpretation of YPB’s beta

YPB Group has a beta of 1.49, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, YPB 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.

Does YPB’s size and industry impact the expected beta?

With a market cap of AU$15.10M, YPB 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 professional services industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the professional services industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of YPB’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Can YPB’s asset-composition point to a higher 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 YPB’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 that fixed assets make up less than a third of the company’s total assets, YPB doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts YPB’s current beta value which indicates an above-average volatility.