If you are looking to invest in Art’s-Way Manufacturing Co Inc’s (NASDAQ:ARTW), 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. ARTW is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, 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.

Check out our latest analysis for Art’s-Way Manufacturing

An interpretation of ARTW’s beta

Art’s-Way Manufacturing’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, ARTW appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Could ARTW’s size and industry cause it to be more volatile?

A market capitalisation of USD $12.41M puts ARTW in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, ARTW also operates in the machinery 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 machinery industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both ARTW’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

Can ARTW’s asset-composition point to a higher 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 ARTW’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. ARTW’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. Thus, we can expect ARTW 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 ARTW’s current beta value which indicates a below-average volatility.