If you are looking to invest in Memphasys Limited’s (ASX:MEM), 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. 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 broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
Check out our latest analysis for Memphasys
What is MEM’s market risk?
Memphasys’s five-year beta of 2.51 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, MEM 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.
Could MEM’s size and industry cause it to be more volatile?
With a market cap of AUD A$1.75M, MEM falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, MEM’s industry, life sciences tools and services, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap MEM but a low beta for the life sciences tools and services industry. This is an interesting conclusion, since its industry suggests MEM 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.
Can MEM’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 test MEM’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 is virtually non-existent in MEM’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect MEM 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. This outcome contradicts MEM’s current beta value which indicates an above-average volatility.