If you are looking to invest in Pacific Star Network Limited’s (ASX:PNW), 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. PNW 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. Different characteristics of a stock expose it to various levels 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.
Check out our latest analysis for Pacific Star Network
What does PNW’s beta value mean?
Pacific Star Network has a beta of 1.22, 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. Based on this beta value, PNW 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 PNW’s size and industry impact the expected beta?
With a market cap of AU$59.59M, PNW falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, PNW operates in the media industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of PNW, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from PNW’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How PNW’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 PNW’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, PNW doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect PNW 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. However, this is the opposite to what PNW’s actual beta value suggests, which is higher stock volatility relative to the market.