If you are looking to invest in Ensurance Limited’s (ASX:ENA), 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. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not every stock is exposed to the same level of market risk, and the broad market index represents a beta value 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.

View our latest analysis for Ensurance

What does ENA’s beta value mean?

With a five-year beta of 0.77, Ensurance appears to be a less volatile company compared to the rest of the 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, ENA appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

How does ENA’s size and industry impact its risk?

A market capitalisation of AU$9.49M puts ENA in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, ENA also operates in the insurance 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 insurance industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both ENA’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is ENA’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 test ENA’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, ENA doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect ENA 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. This is consistent with is current beta value which also indicates low volatility.