For Kairos Capital Corporation’s (TSXV:KRS) 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 KRS. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as KRS, 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 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.

See our latest analysis for KRS

What does KRS's beta value mean?

Kairos Capital’s five-year beta of 1.05 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. According to this value of beta, KRS may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.

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

A market capitalisation of CAD $50.62M puts KRS in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, KRS also operates in the materials 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 X industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of KRS’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

Is KRS'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 examine KRS’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. KRS's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of KRS indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This is consistent with is current beta value which also indicates high volatility.