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For Enterprise Development Holdings Limited’s (SEHK:1808) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures 1808’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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.
View our latest analysis for Enterprise Development Holdings
An interpretation of 1808’s beta
With a beta of 1.02, Enterprise Development Holdings is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, 1808 will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
How does 1808’s size and industry impact its risk?
1808, with its market capitalisation of HK$1.12B, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the it industry, which has been found to have high sensitivity to market-wide shocks. 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 supports our interpretation of 1808’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Is 1808’s cost structure indicative of a high 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 1808’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 an insignificant portion of total assets, 1808 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect 1808 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 1808’s actual beta value suggests, which is higher stock volatility relative to the market.