Can Ross Group plc (LON:RGP) Improve Your Portfolio Returns?

For Ross Group plc’s (LSE:RGP) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as RGP. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as RGP, because it is rare that an entire industry collapses at once. 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.

Not every stock is exposed to the same level of market risk. The most widely used metric to quantify a stock's market risk is beta, and the market as a whole represents a beta 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.

What does RGP's beta value mean?

Ross Group's beta of 0.39 indicates that the stock value will be less variable compared to the whole stock market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, RGP appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Does RGP's size and industry impact the expected beta?

RGP, with its market capitalisation of £987.14K, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, RGP also operates in the retail distributors 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 retail distributors industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both RGP’s size and industry indicates the stock should have a higher beta than it currently has.

Can RGP'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 RGP’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, RGP 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, RGP’s beta value conveys the same message.

What this means for you:

RGP may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as RGP is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether XYZ is a good investment for you, we also need to consider important company-specific fundamentals such as Ross Group’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

1. Financial Health: Is RGP’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.

2. Past Track Record: Has RGP been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of RGP's historicals for more clarity.

3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.