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If you are a shareholder in National American University Holdings Inc’s (NASDAQ:NAUH), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures NAUH’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. 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.
See our latest analysis for National American University Holdings
What does NAUH’s beta value mean?
National American University Holdings’s beta of 0.16 indicates that the stock value will be less variable compared to the whole stock market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, NAUH 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 NAUH’s size and industry impact its risk?
With a market cap of US$27.00M, NAUH 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 consumer 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 consumer services industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both NAUH’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is NAUH’s cost structure indicative of a high 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 NAUH’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, NAUH appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect NAUH 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 NAUH’s current beta value which indicates a below-average volatility.