U.S. Markets closed

What You Must Know About China Grand Pharmaceutical and Healthcare Holdings Limited's (HKG:512) Beta Value

Simply Wall St

Anyone researching China Grand Pharmaceutical and Healthcare Holdings Limited (HKG:512) might want to consider the historical volatility of the share price. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.

Some stocks are more sensitive to general market forces than others. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said 'volatility is far from synonymous with risk' in his 2014 letter to investors. So, while useful, beta is not the only metric to consider. To use beta as an investor, you must first understand that the overall market has a beta of one. A stock with a beta below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.

Check out our latest analysis for China Grand Pharmaceutical and Healthcare Holdings

What does 512's beta value mean to investors?

Looking at the last five years, China Grand Pharmaceutical and Healthcare Holdings has a beta of 1.32. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If the past is any guide, we would expect that China Grand Pharmaceutical and Healthcare Holdings shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Beta is worth considering, but it's also important to consider whether China Grand Pharmaceutical and Healthcare Holdings is growing earnings and revenue. You can take a look for yourself, below.

SEHK:512 Income Statement, September 10th 2019

How does 512's size impact its beta?

China Grand Pharmaceutical and Healthcare Holdings is a small cap stock with a market capitalisation of HK$14b. Most companies this size are actively traded. It has a relatively high beta, which is not unusual among small-cap stocks. Because it takes less capital to move the share price of a smaller company, actively traded small-cap stocks often have a higher beta that a similar large-cap stock.

What this means for you:

Beta only tells us that the China Grand Pharmaceutical and Healthcare Holdings share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there's plenty more to learn. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as China Grand Pharmaceutical and Healthcare Holdings’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for 512’s future growth? Take a look at our free research report of analyst consensus for 512’s outlook.
  2. Past Track Record: Has 512 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 512's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how 512 measures up against other companies on valuation. You could start with this free list of prospective options.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.