For SmartPay Holdings Limited’s (NZSE:SPY) 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 SPY’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 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.

Check out our latest analysis for SmartPay Holdings

What does SPY's beta value mean?

SmartPay Holdings’s beta of 0.92 indicates that the company is less volatile relative to the diversified market portfolio. 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, SPY appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

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

With a market cap of NZD $37.79M, SPY falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the it services industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the it services industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both SPY’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

How SPY'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 examine SPY’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. SPY'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. Thus, we can expect SPY to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts SPY’s current beta value which indicates a below-average volatility.

What this means for you:

Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto SPY. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, SPY may be a valuable stock to hold onto in order to cushion the impact of a downturn.

Are you a potential investor? Depending on the composition of your portfolio, SPY may be a valuable addition to cushion the impact of a downturn. Potential investors should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in SPY, as well as where we are in the current economic cycle.

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 SmartPay 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 SmartPay 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.