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For Urbanisecom Limited’s (ASX:UBN) 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. 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 Urbanise.com
An interpretation of UBN’s beta
With a five-year beta of 0.16, Urbanise.com appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. UBN’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
How does UBN’s size and industry impact its risk?
A market capitalisation of AU$14.33M puts UBN in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, UBN’s industry, internet, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap UBN but a low beta for the internet industry. This is an interesting conclusion, since both UBN’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.
Can UBN’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 UBN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since UBN’s fixed assets are only 3.77% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. 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. Similarly, UBN’s beta value conveys the same message.