If you are looking to invest in Funtastic Limited’s (ASX:FUN), 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. 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 every stock is exposed 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
View our latest analysis for Funtastic
What is FUN’s market risk?
With a beta of 1.06, Funtastic is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, FUN 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 FUN’s size and industry impact its risk?
A market capitalisation of AUD A$29.80M puts FUN in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, FUN also operates in the distributors industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the distributors industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of FUN’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
How FUN’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 test FUN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, FUN appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect FUN 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. Similarly, FUN’s beta value conveys the same message.