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. The beta measures ENA’s exposure to the wider market risk, which reflects changes in economic and political factors. 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.
See our latest analysis for ENA
What is ENA’s market risk?
Ensurance has a beta of 1.25, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, ENA can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Could ENA's size and industry cause it to be more volatile?
A market capitalisation of AUD $6.65M puts ENA in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, ENA’s industry, insurance, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of ENA’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can ENA's asset-composition point to a higher 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 ENA’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of 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. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. However, this is the opposite to what ENA’s actual beta value suggests, which is higher stock volatility relative to the market.