If you are looking to invest in Fuwei Films (Holdings) Co Ltd’s (NASDAQ:FFHL), 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. Generally, an investor should consider two types of risk that impact the market value of FFHL. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as FFHL, because it is rare that an entire industry collapses at once. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Not all stocks are expose 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. 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.
What is FFHL’s market risk?
Fuwei Films (Holdings)’s beta of 0.83 indicates that the company is less volatile relative to the diversified market portfolio.The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more.FFHL’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Does FFHL's size and industry impact the expected beta?
FFHL, with its market capitalisation of USD $9.31M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the materials 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 materials industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by FFHL’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is FFHL's cost structure indicative of a high 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 FFHL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint.With a fixed-assets-to-total-assets ratio of greater than 30%, FFHL 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 FFHL 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. This outcome contradicts FFHL’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? FFHL 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 FFHL is valuable to lower your risk of market exposure, in particular, during times of economic decline.
Are you a potential investor? Depending on the composition of your portfolio, FFHL may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in FFHL, as well as where we are in the current economic cycle.
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 Fuwei Films (Holdings) 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 Fuwei Films (Holdings) 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.