If you are looking to invest in Healthscope Limited’s (ASX:HSO), 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 HSO’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels 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 Healthscope

What is HSO’s market risk?

Healthscope’s beta of 0.57 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in HSO’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. HSO’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.

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

With a market capitalisation of AUD A$3.65B, HSO is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. Moreover, HSO’s industry, healthcare, is considered to be defensive, which means it is more volatile than the market over the economic cycle. As a result, we should expect lower beta for larger stocks in a defensive industry compared to smaller stocks in a cyclical industry. This supports our interpretation of HSO’s beta value discussed above. Next, we will examine the fundamental factors which can result in a more defensive nature of a stock.

Is HSO’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 HSO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, HSO appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect HSO to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts HSO’s current beta value which indicates a below-average volatility.