Should You Be Concerned About NMC Health Plc’s (LON:NMC) Risks?
For NMC Health Plc’s (LSE:NMC) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact 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 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.
View our latest analysis for NMC Health
What does NMC’s beta value mean?
With a five-year beta of 0.21, NMC Health appears to be a less volatile company compared to the rest of the market. This means that the change in NMC’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, NMC appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does NMC’s size and industry impact its risk?
A market capitalisation of UK£6.58B puts NMC in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. Furthermore, the company operates in the healthcare industry, which has been found to have low sensitivity to market-wide shocks. Hence, investors should expect a lower beta for larger companies operating in a defensive industry in contrast with higher beta for smaller firms in a more cyclical industry. This is consistent with NMC’s individual beta value we discussed above. Next, we will examine the fundamental factors which can result in a more defensive nature of a stock.
Can NMC’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 NMC’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 NMC’s fixed assets are only 27.18% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. 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. Similarly, NMC’s beta value conveys the same message.
What this means for you:
You may reap the benefit of muted movements during times of economic decline by holding onto NMC. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. What I have not mentioned in my article here are important company-specific fundamentals such as NMC Health’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
1. Future Outlook: What are well-informed industry analysts predicting for NMC’s future growth? Take a look at our free research report of analyst consensus for NMC’s outlook.
2. Past Track Record: Has NMC been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of NMC’s historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks 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.
