If you are looking to invest in Transcendence Technologies Limited’s (ASX:TTL), 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 TTL’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
Check out our latest analysis for Transcendence Technologies
An interpretation of TTL’s beta
Transcendence Technologies has a beta of 2.67, 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. According to this value of beta, TTL 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.
Could TTL’s size and industry cause it to be more volatile?
TTL, with its market capitalisation of AU$4.86M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the software industry, which has been found to have high sensitivity to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of TTL’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can TTL’s asset-composition point to a higher 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 TTL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in TTL’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect TTL 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 TTL’s current beta value which indicates an above-average volatility.