For China Advanced Construction Materials Group Inc’s (NASDAQ:CADC) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of CADC. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as CADC, because it is rare that an entire industry collapses at once. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Different characteristics of a stock expose it to various levels of market risk. A widely-used metric to measure a stock’s market risk is beta, 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.See our latest analysis for China Advanced Construction Materials Group
An interpretation of CADC’s beta
China Advanced Construction Materials Group has a beta of 1.32, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, CADC 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.
Does CADC’s size and industry impact the expected beta?
CADC, with its market capitalisation of US$5.73M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the basic materials industry, which has been found to have high sensitivity to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with CADC’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is CADC’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 test CADC’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since CADC’s fixed assets are only 5.96% 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. However, this is the opposite to what CADC’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You could benefit from higher returns during times of economic growth by holding onto CADC. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as China Advanced Construction Materials Group’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is CADC’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.
- Past Track Record: Has CADC 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 CADC’s historicals for more clarity.
- 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.