If you are a shareholder in Pan Asia Corporation Limited's ( ASX:PZC ), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures PZC's exposure to the wider market risk, which reflects changes in economic and political factors. 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.
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An interpretation of PZC's beta
Pan Asia's five-year beta of 1.1 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. Based on this beta value, PZC 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 PZC's size and industry impact the expected beta?
With a market cap of AUD $1.23M, PZC falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the oil, gas and consumable fuels industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil, gas and consumable fuels industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of PZC's beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Is PZC'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 PZC's ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, PZC appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect PZC to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. Similarly, PZC's beta value conveys the same message.
What this means for you:
Are you a shareholder?You may reap the gains of PZC's returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk.
Are you a potential investor?Before you buy PZC, you should factor how your portfolio currently moves with the wider market, and where we are in the economic cycle. This stock could be an outperformer during times of growth, and it may be worth taking a deeper dive into the fundamentals to crystalize your thoughts on PZC.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Pan Asia for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Pan Asia anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential .
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
