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How Perfect Shape Medical Limited (HKG:1830) Can Impact Your Portfolio Volatility

Simply Wall St

Anyone researching Perfect Shape Medical Limited (HKG:1830) might want to consider the historical volatility of the share price. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a portfolio. The second type is the broader market volatility, which you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks on the market.

Some stocks mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated price movements. 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 greater than one is more sensitive to broader market movements than a stock with a beta of less than one.

Check out our latest analysis for Perfect Shape Medical

What we can learn from 1830's beta value

Given that it has a beta of 1.29, we can surmise that the Perfect Shape Medical share price has been fairly sensitive to market volatility (over the last 5 years). If the past is any guide, we would expect that Perfect Shape Medical shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see Perfect Shape Medical's revenue and earnings in the image below.

SEHK:1830 Income Statement, November 8th 2019

Could 1830's size cause it to be more volatile?

Perfect Shape Medical is a noticeably small company, with a market capitalisation of HK$3.8b. Most companies this size are not always actively traded. It has a relatively high beta, suggesting it is fairly actively traded for a company of its size. Because it takes less capital to move the share price of a small company like this, when a stock this size is actively traded it is quite often more sensitive to market volatility than similar large companies.

What this means for you:

Since Perfect Shape Medical has a reasonably high beta, it's worth considering why it is so heavily influenced by broader market sentiment. For example, it might be a high growth stock or have a lot of operating leverage in its business model. In order to fully understand whether 1830 is a good investment for you, we also need to consider important company-specific fundamentals such as Perfect Shape Medical’s financial health and performance track record. I highly recommend you dive deeper by considering the following:

  1. Future Outlook: What are well-informed industry analysts predicting for 1830’s future growth? Take a look at our free research report of analyst consensus for 1830’s outlook.
  2. Past Track Record: Has 1830 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 1830's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how 1830 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.