Should You Be Concerned About Sanghvi Forging & Engineering Limited's (NSE:SANGHVIFOR) Historical Volatility?

If you own shares in Sanghvi Forging & Engineering Limited (NSE:SANGHVIFOR) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. 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 type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. 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 mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated 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. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.

View our latest analysis for Sanghvi Forging & Engineering

What we can learn from SANGHVIFOR's beta value

Zooming in on Sanghvi Forging & Engineering, we see it has a five year beta of 0.85. This is below 1, so historically its share price has been rather independent from the market. If history is a good guide, owning the stock should help ensure that your portfolio is not overly sensitive to market volatility. 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 Sanghvi Forging & Engineering's revenue and earnings in the image below.

Does SANGHVIFOR's size influence the expected beta?

Sanghvi Forging & Engineering is a rather small company. It has a market capitalisation of ₹369m, which means it is probably under the radar of most investors. It is not unusual for very small companies to have a low beta value, especially if only low volumes of shares are traded. Even when they are traded more actively, the share price is often more susceptible to company specific developments than overall market volatility.

What this means for you:

The Sanghvi Forging & Engineering doesn't usually show much sensitivity to the broader market. This could be for a variety of reasons. Typically, smaller companies have a low beta if their share price tends to move a lot due to company specific developments. Alternatively, an strong dividend payer might move less than the market because investors are valuing it for its income stream. In order to fully understand whether SANGHVIFOR is a good investment for you, we also need to consider important company-specific fundamentals such as Sanghvi Forging & Engineering’s financial health and performance track record. I highly recommend you dive deeper by considering the following:

1. Financial Health: Are SANGHVIFOR’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has SANGHVIFOR 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 SANGHVIFOR's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.