If you are a shareholder in RedHill Biopharma Ltd’s (NASDAQ:RDHL), 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 all stocks are expose to the same level of market risk, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

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An interpretation of RDHL's beta

RedHill Biopharma's beta of 0.3 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. RDHL'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.

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

RDHL, with its market capitalisation of USD $180.97M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, RDHL’s industry, pharmaceuticals, 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 RDHL, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from RDHL’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Can RDHL'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 examine RDHL’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since RDHL’s fixed assets are only 1.36% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect RDHL 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, RDHL’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 RDHL. 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.

Are you a potential investor? Before you buy RDHL, you should look at the stock in conjunction with their current portfolio holdings. RDHL may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment.

Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on RedHill Biopharma for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in RedHill Biopharma anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.