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If you are a shareholder in Growthpoint Properties Australia’s (ASX:GOZ), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. GOZ 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. Different characteristics of a stock expose it to various levels 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.
See our latest analysis for Growthpoint Properties Australia
An interpretation of GOZ’s beta
With a five-year beta of 0.25, Growthpoint Properties Australia appears to be a less volatile company compared to the rest of the market. This means that the change in GOZ’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. GOZ’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
How does GOZ’s size and industry impact its risk?
GOZ, with its market capitalisation of AU$2.30B, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, GOZ also operates in the reits industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap GOZ but a low beta for the reits industry. It seems as though there is an inconsistency in risks portrayed by GOZ’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How GOZ’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 examine GOZ’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. GOZ’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect GOZ to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts GOZ’s current beta value which indicates a below-average volatility.