If you are looking to invest in Imobiliária Construtora Grão Pará SA.’s (ENXTLS:GPA), 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 GPA’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.
Check out our latest analysis for Imobiliária Construtora Grão Pará
What does GPA’s beta value mean?
Imobiliária Construtora Grão Pará’s five-year beta of 1.96 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, GPA 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 GPA’s size and industry impact the expected beta?
With a market cap of €374.97K, GPA falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, GPA’s industry, hospitality, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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 is consistent with GPA’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Is GPA’s cost structure indicative of a high 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 examine GPA’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, GPA doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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. However, this is the opposite to what GPA’s actual beta value suggests, which is higher stock volatility relative to the market.