If you are looking to invest in Seven Stars Cloud Group Inc’s (NASDAQ:SSC), 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 SSC’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 broad market index 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.
See our latest analysis for Seven Stars Cloud Group
What does SSC’s beta value mean?
Seven Stars Cloud Group’s five-year beta of 1.78 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, SSC can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
How does SSC’s size and industry impact its risk?
SSC, with its market capitalisation of USD $287.07M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the internet industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with SSC’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Is SSC’s cost structure indicative of a high beta?
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test SSC’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 an insignificant portion of total assets, SSC doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect SSC 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 SSC’s current beta value which indicates an above-average volatility.