Anyone researching Prabhat Dairy Limited (NSE:PRABHAT) might want to consider the historical volatility of the share price. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.
Some stocks are more sensitive to general market forces than others. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that ‘Volatility is far from synonymous with risk’, beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.
Check out our latest analysis for Prabhat Dairy
What we can learn from PRABHAT’s beta value
Given that it has a beta of 1.69, we can surmise that the Prabhat Dairy share price has been fairly sensitive to market volatility (over the last 5 years). Based on this history, investors should be aware that Prabhat Dairy are likely to rise strongly in times of greed, but sell off in times of fear. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see Prabhat Dairy’s revenue and earnings in the image below.
Does PRABHAT’s size influence the expected beta?
Prabhat Dairy is a rather small company. It has a market capitalisation of ₹6.4b, which means it is probably under the radar of most investors. It has a relatively high beta, suggesting it is fairly actively traded for a company of its size. Because it takes less capital to move the share price of a small company like this, when a stock this size is actively traded it is quite often more sensitive to market volatility than similar large companies.
What this means for you:
Since Prabhat Dairy tends to moves up when the market is going up, and down when it’s going down, potential investors may wish to reflect on the overall market, when considering the stock. In order to fully understand whether PRABHAT is a good investment for you, we also need to consider important company-specific fundamentals such as Prabhat Dairy’s financial health and performance track record. I urge you to continue your research by taking a look at the following: