If you are a shareholder in Lafe Corporation Limited’s (SGX:AYB), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. AYB 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. Not every stock is exposed to the same level of market risk, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
Check out our latest analysis for Lafe
An interpretation of AYB’s beta
With a five-year beta of 0.68, Lafe appears to be a less volatile company compared to the rest of the market. This means that the change in AYB’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, AYB appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does AYB’s size and industry impact the expected beta?
A market capitalisation of SGD SGD20.14M puts AYB in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, AYB also operates in the real estate management and development industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the real estate management and development industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by AYB’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is AYB’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 examine AYB’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 an insignificant portion of total assets, AYB 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. Similarly, AYB’s beta value conveys the same message.