For ValiRx plc’s (AIM:VAL) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures VAL’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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.

View our latest analysis for ValiRx

What does VAL's beta value mean?

ValiRx’s beta of 0.5 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, VAL appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Could VAL's size and industry cause it to be more volatile?

With a market cap of GBP £2.09M, VAL falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, VAL’s industry, biotechnology, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of VAL, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests VAL should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

Can VAL's asset-composition point to a higher 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 VAL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, VAL seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect VAL 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. Similarly, VAL’s beta value conveys the same message.

What this means for you:

Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto VAL. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.