One Thing To Consider Before Buying Primary Health Care Limited (ASX:PRY)
For Primary Health Care Limited’s (ASX:PRY) 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 PRY’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels 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 Primary Health Care
What is PRY’s market risk?
Primary Health Care's beta of 0.27 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in PRY'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. PRY's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could PRY's size and industry cause it to be more volatile?
PRY, with its market capitalisation of AUD $1.63B, is a small-cap stock, which generally have higher beta than similar companies of larger size. However, PRY operates in the healthcare providers and services industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of PRY, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from PRY’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can PRY's asset-composition point to a higher 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 PRY’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, PRY doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect PRY to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto PRY. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
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 Primary Health Care 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 Primary Health Care 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.
