UK Markets closed

Edelweiss Financial Services Limited (NSE:EDELWEISS): What Does Its Beta Value Mean For Your Portfolio?

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

If you're interested in Edelweiss Financial Services Limited (NSE:EDELWEISS), then you might want to consider its beta (a measure of share price volatility) in order to understand how the stock could impact your portfolio. 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated 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.

View our latest analysis for Edelweiss Financial Services

What we can learn from EDELWEISS's beta value

As it happens, Edelweiss Financial Services has a five year beta of 1.0. This is fairly close to 1, so the stock has historically shown a somewhat similar level of volatility as the market. While history does not always repeat, this may indicate that the stock price will continue to be exposed to market risk, albeit not overly so. 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 Edelweiss Financial Services's revenue and earnings in the image below.

NSEI:EDELWEISS Income Statement, May 4th 2019

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

With a market capitalisation of ₹131b, Edelweiss Financial Services is a small cap stock. However, it is big enough to catch the attention of professional investors. It takes less capital to move the share price of small companies, and they are also more impacted by company specific events, so it's a bit of a surprise that the beta is so close to the overall market.

What this means for you:

Since Edelweiss Financial Services has a beta close to one, it will probably show a positive return when the market is moving up, based on history. If you're trying to generate better returns than the market, it would be worth thinking about other metrics such as cashflows, dividends and revenue growth might be a more useful guide to the future. In order to fully understand whether EDELWEISS is a good investment for you, we also need to consider important company-specific fundamentals such as Edelweiss Financial Services’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 EDELWEISS’s future growth? Take a look at our free research report of analyst consensus for EDELWEISS’s outlook.
  2. Past Track Record: Has EDELWEISS 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 EDELWEISS's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how EDELWEISS 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.