For ITL Health Group’s (ASX:ITD) 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 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.
Check out our latest analysis for ITL Health Group
What does ITD’s beta value mean?
ITL Health Group’s beta of 0.69 indicates that the stock value will be less variable compared to the whole stock market. 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. ITD’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Could ITD’s size and industry cause it to be more volatile?
A market capitalisation of AUD A$39.35M puts ITD in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, ITD operates in the medical equipment industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of ITD, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from ITD’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can ITD’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 examine ITD’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, ITD appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of ITD indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts ITD’s current beta value which indicates a below-average volatility.