If you are looking to invest in HFA Holdings Limited’s (ASX:HFA), 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. HFA is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and 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. 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.

See our latest analysis for HFA

What is HFA’s market risk?

With a five-year beta of 0.1, HFA Holdings appears to be a less volatile company compared to the rest of the market. This means that the change in HFA's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, HFA appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

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

With a market cap of AUD $436.18M, HFA falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, HFA also operates in the capital markets industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the capital markets industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by HFA’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How HFA's assets could affect its 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 HFA’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, HFA seems to have a smaller dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This is consistent with is current beta value which also indicates low volatility.

What this means for you:

Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto HFA. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into HFA.

Are you a potential investor? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail.

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 HFA Holdings 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 HFA Holdings 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.