If you are looking to invest in All Asia Asset Capital Limited’s (AIM:AAA), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. There are two types of risks that affect the market value of a listed company such as AAA. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
Different characteristics of a stock expose it to various levels of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole 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.See our latest analysis for All Asia Asset Capital
What does AAA’s beta value mean?
With a five-year beta of 0.67, All Asia Asset Capital appears to be a less volatile company compared to the rest of the market. This means that the change in AAA’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. AAA’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.
Could AAA’s size and industry cause it to be more volatile?
With a market cap of UK£7.45M, AAA falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, AAA also operates in the capital markets industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap AAA but a low beta for the capital markets industry. This is an interesting conclusion, since both AAA’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How AAA’s assets could affect its 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 AAA’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, AAA doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect AAA 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 is consistent with is current beta value which also indicates low volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto AAA. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether AAA is a good investment for you, we also need to consider important company-specific fundamentals such as All Asia Asset Capital’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is AAA’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.