If you are a shareholder in SunLink Health Systems Inc’s (AMEX:SSY), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. SSY is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not all stocks are expose to the same level 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.
See our latest analysis for SunLink Health Systems
An interpretation of SSY’s beta
With a five-year beta of 0.63, SunLink Health Systems appears to be a less volatile company compared to the rest of the 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. SSY’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 SSY’s size and industry cause it to be more volatile?
With a market cap of USD $14.57M, SSY falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Conversely, the company operates in the healthcare industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of SSY, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from SSY’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How SSY’s assets could affect its 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 SSY’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, SSY seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of SSY indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what SSY’s actual beta value suggests, which is lower stock volatility relative to the market.