For Probiotec Limited’s (ASX:PBP) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures PBP’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose 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.

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What does PBP’s beta value mean?

Probiotec’s beta of 0.38 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. Based on this beta value, PBP appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Could PBP’s size and industry cause it to be more volatile?

PBP, with its market capitalisation of AUD A$54.75M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Conversely, the company operates in the pharmaceuticals industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of PBP, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests PBP should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How PBP’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 PBP’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. PBP’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of PBP indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what PBP’s actual beta value suggests, which is lower stock volatility relative to the market.

What this means for you:

Are you a shareholder? PBP may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as PBP is valuable to lower your risk of market exposure, in particular, during times of economic decline. For next steps, take a look at PBP’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.

Are you a potential investor? Before you buy PBP, you should look at the stock in conjunction with their current portfolio holdings. PBP may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping into the investment. Continue your research on the stock with our free fundamental research report for PBP here.

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.