For NK Industries Limited’s (NSEI:NKIND) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 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. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
Check out our latest analysis for N.K Industries
What does NKIND’s beta value mean?
N.K Industries’s five-year beta of 1.77 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. Based on this beta value, NKIND 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.
Could NKIND’s size and industry cause it to be more volatile?
With a market cap of INR ₹389.14M, NKIND falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, NKIND’s industry, food products, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of NKIND, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests NKIND should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can NKIND’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 NKIND’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, NKIND seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect NKIND 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. This is consistent with is current beta value which also indicates high volatility.