If you are a shareholder in Ariadne Australia Limited’s (ASX:ARA), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures ARA’s exposure to the wider market risk, which reflects changes in economic and political factors. 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 ARA
An interpretation of ARA’s beta
With a five-year beta of 0.56, Ariadne Australia appears to be a less volatile company compared to the rest of the market. This means that the change in ARA’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, ARA appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does ARA’s size and industry impact the expected beta?
A market capitalisation of AUD A$146.77M puts ARA in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, ARA’s industry, commercial services and supplies, 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 commercial services and supplies industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both ARA’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is ARA’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 ARA’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 is virtually non-existent in ARA’s operations, it has low dependency on fixed costs to generate revenue. 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. Similarly, ARA’s beta value conveys the same message.