If you are looking to invest in Leader Environmental Technologies Limited’s (SGX:LS9), 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. LS9 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. 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
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An interpretation of LS9’s beta
With a five-year beta of 0.66, Leader Environmental Technologies appears to be a less volatile company compared to the rest of the market. This means that the change in LS9’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. LS9’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 LS9’s size and industry impact its risk?
With a market cap of SGD SGD21.60M, LS9 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, LS9’s industry, commercial services and supplies, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the commercial services and supplies industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both LS9’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can LS9’s asset-composition point to a higher 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 LS9’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since LS9’s fixed assets are only 8.85% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. 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. Similarly, LS9’s beta value conveys the same message.