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How G4S plc (LON:GFS) Can Impact Your Portfolio Volatility

Simply Wall St

If you're interested in G4S plc (LON:GFS), 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. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.

Some stocks are more sensitive to general market forces than others. 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 G4S

What does GFS's beta value mean to investors?

Looking at the last five years, G4S has a beta of 0.81. The fact that this is well below 1 indicates that its share price movements haven't historically been very sensitive to overall market volatility. This means that -- if history is a guide -- buying the stock would reduce the impact of overall market volatility in many portfolios (depending on the beta of the portfolio, of course). 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 G4S's revenue and earnings in the image below.

LSE:GFS Income Statement, November 13th 2019

Does GFS's size influence the expected beta?

G4S is a fairly large company. It has a market capitalisation of UK£3.1b, which means it is probably on the radar of most investors. It is a little unusual to see big companies like this trade on low beta values. Oftentimes there is some other clear influence on the share price, overshadowing market volatility.

What this means for you:

Since G4S is not heavily influenced by market moves, its share price is probably far more dependend on company specific developments. It could pay to take a closer look at metrics such as revenue growth, earnings growth, and debt. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as G4S’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

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