If you are a shareholder in Simavita Limited’s (ASX:SVA), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of 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 SVA
What is SVA’s market risk?
With a beta of 1.43, Simavita is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, SVA will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Does SVA’s size and industry impact the expected beta?
SVA, with its market capitalisation of AUD A$7.13M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Conversely, the company operates in the healthcare equipment and supplies industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap SVA but a low beta for the healthcare equipment and supplies industry. This is an interesting conclusion, since its industry suggests SVA should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How SVA’s assets could affect its 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 SVA’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, SVA seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect SVA 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. However, this is the opposite to what SVA’s actual beta value suggests, which is higher stock volatility relative to the market.