If you’re interested in China Distance Education Holdings Limited (NYSE:DL), 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 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 are more sensitive to general market forces than others. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that ‘Volatility is far from synonymous with risk’, beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. A stock with a beta below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.
What does DL’s beta value mean to investors?
Zooming in on China Distance Education Holdings, we see it has a five year beta of 1.18. This is above 1, so historically its share price has been influenced by the broader volatility of the stock market. If this beta value holds true in the future, China Distance Education Holdings shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Beta is worth considering, but it’s also important to consider whether China Distance Education Holdings is growing earnings and revenue. You can take a look for yourself, below.
Could DL’s size cause it to be more volatile?
China Distance Education Holdings is a noticeably small company, with a market capitalisation of US$309m. Most companies this size are not always actively traded. It takes less money to influence the share price of a very small company. This may explain the excess volatility implied by this beta value.
What this means for you:
Beta only tells us that the China Distance Education Holdings share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there’s plenty more to learn. In order to fully understand whether DL is a good investment for you, we also need to consider important company-specific fundamentals such as China Distance Education Holdings’s financial health and performance track record. I highly recommend you dive deeper by considering the following:
- Future Outlook: What are well-informed industry analysts predicting for DL’s future growth? Take a look at our free research report of analyst consensus for DL’s outlook.
- Past Track Record: Has DL 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 DL’s historicals for more clarity.
- Other Interesting Stocks: It’s worth checking to see how DL measures up against other companies on valuation. You could start with this free list of prospective options.
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