If you are looking to invest in China Wah Yan Healthcare Limited’s (SEHK:648), 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. 648 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. Not all stocks are expose to the same level of market risk, and the market as a whole 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.

Check out our latest analysis for China Wah Yan Healthcare

What is 648’s market risk?

China Wah Yan Healthcare’s five-year beta of 2.7 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. Based on this beta value, 648 will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.

Does 648’s size and industry impact the expected beta?

With a market cap of HK$123.89M, 648 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, 648 operates in the healthcare industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap 648 but a low beta for the healthcare industry. It seems as though there is an inconsistency in risks from 648’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

How 648’s assets could affect its 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 648’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, 648 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect 648 to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what 648’s actual beta value suggests, which is higher stock volatility relative to the market.