If you are a shareholder in Sing Lee Software (Group) Limited’s (SEHK:8076), 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 8076’s exposure to the wider market risk, which reflects changes in economic and political factors. 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
View our latest analysis for Sing Lee Software (Group)
What does 8076’s beta value mean?
Sing Lee Software (Group) has a beta of 2.06, 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. Based on this beta value, 8076 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 8076’s size and industry impact the expected beta?
With a market cap of HKD HK$146.09M, 8076 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, 8076’s industry, software, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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 8076’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How 8076’s assets could affect its 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 examine 8076’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, 8076 seems to have a smaller 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. This outcome contradicts 8076’s current beta value which indicates an above-average volatility.