For Code Agriculture (Holdings) Limited’s (SEHK:8153) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 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 all stocks are expose to the same level of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
Check out our latest analysis for Code Agriculture (Holdings)
What does 8153’s beta value mean?
Code Agriculture (Holdings)’s five-year beta of 2.26 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, 8153 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 8153’s size and industry impact the expected beta?
8153, with its market capitalisation of HKD HK$366.35M, is a small-cap stock, which generally have higher beta than similar companies of larger size. However, 8153 operates in the media industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap 8153 but a low beta for the media industry. This is an interesting conclusion, since its industry suggests 8153 should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is 8153’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 8153’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, 8153 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect 8153 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 8153’s current beta value which indicates an above-average volatility.