The beta (symbol: β) represents the unique risk profile of a company. It increases or reduces the risk premium given in a company’s country for investing in the equity market rather than in lower risk public debt.
If it is higher than 1, it means that a company’s equity is expected to overperform the market in good times and underperform it in bad moments – it is riskier than the market, yielding higher returns or worse losses. If it is lower, it means the company’s stock price will usually gain or lose less than the market average – it is less risky.
Company-level beta computation requires a relevant amount of data, usually unavailable for companies other than public entities. For private entities one needs to look at group factors rather than individual company ones, an example being industry-level betas.
These are computed by comparing the returns of all companies belonging to one industry with the average returns of all equity investments. The resulting beta will be applied to all companies belonging to that industry.
The same procedure can be generalized for any group: companies with a given number of employees, companies with sales within a certain range, etc.
Dealing with young, fast growing companies, Equidam applies group betas. In order to capture the widest array of relevant risk factors, Equidam’s beta is the arithmetic average of four group betas.These groups are:
- Number of employees
- Profitability, given companies’ stage of development
Their sources are the the online dataset curated with annual updates by Prof. Aswath Damodaran of New York University, along with his further studies.
Alchemic Jump is an innovative company founded in 2016 to produce a new type of shoes. It is expanding its business, being close to USD 1M in revenues for 2018, and employs 30 people. It is not profitable yet.
Its group betas are:
- 4.94 as the company belongs to the Footware industry
- 0.86 as it has more than 25 and less than 100 employees
- 1.14 because it is in expansion stage, but not profitable
- 0.96 since it was founded 2 years ago
It follows Alchemic Jump’s total beta is 1.975.