If you are a shareholder in Baker Technology Limited’s (SGX:BTP), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of 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 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 Baker Technology
An interpretation of BTP’s beta
With a five-year beta of 0.74, Baker Technology appears to be a less volatile company compared to the rest of the market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, BTP appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does BTP’s size and industry impact its risk?
A market capitalisation of SGD SGD129.84M puts BTP in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, BTP also operates in the energy equipment and services industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap BTP but a low beta for the energy equipment and services industry. This is an interesting conclusion, since both BTP’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.
How BTP’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 examine BTP’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, BTP appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect BTP 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. However, this is the opposite to what BTP’s actual beta value suggests, which is lower stock volatility relative to the market.