For YPB Group Limited’s (ASX:YPB) 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 YPB’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels 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.
View our latest analysis for YPB Group
What does YPB’s beta value mean?
YPB Group’s five-year beta of 1.11 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, YPB can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Could YPB’s size and industry cause it to be more volatile?
YPB, with its market capitalisation of AUD A$16.78M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, YPB’s industry, professional services, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of YPB’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How YPB’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 YPB’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 less than a third of the company’s total assets, YPB doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect YPB 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. This outcome contradicts YPB’s current beta value which indicates an above-average volatility.