For Anteo Diagnostics Limited’s (ASX:ADO) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 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 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.
See our latest analysis for ADO
An interpretation of ADO’s beta
Anteo Diagnostics’s beta of 0.25 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. Based on this beta value, ADO appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does ADO’s size and industry impact the expected beta?
ADO, with its market capitalisation of AUD A$18.44M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Conversely, the company operates in the life sciences tools and services industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of ADO, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from ADO’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How ADO’s assets could affect its 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 ADO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since ADO’s fixed assets are only 12.07% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect ADO 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.