If you are looking to invest in Anteo Diagnostics Limited’s (ASX:ADO), 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. The beta measures ADO’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

View our latest analysis for Anteo Diagnostics

What is ADO’s market risk?

Anteo Diagnostics’s beta of 0.75 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. ADO’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 ADO’s size and industry impact the expected beta?

ADO, with its market capitalisation of AU$16.14M, is a small-cap stock, which generally have higher beta than similar companies of larger size. However, ADO operates in the life sciences industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap ADO but a low beta for the life sciences industry. It seems as though there is an inconsistency in risks from ADO’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is ADO’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 ADO’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. ADO’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 ADO indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what ADO’s actual beta value suggests, which is lower stock volatility relative to the market.