How much a stock moves relative to the overall market. A beta of 1.0 moves in line with the market. Below 0.5 is defensive; above 1.5 amplifies market swings. Most value investors prefer stocks with beta between 0.5 and 1.2.
Formula
Description
Measures the stock's sensitivity to overall market movements over the past five years using monthly returns. A beta of 1.0 means the stock moves in line with the market. Beta is a key input in the Capital Asset Pricing Model (CAPM) for calculating cost of equity.
Interpretation
0.5-1.2 is the ideal range for most value investors. Below 0.5 indicates a defensive stock that moves less than the market. Above 1.5 means the stock amplifies market moves, adding volatility. Negative beta (very rare) means the stock moves inversely to the market.
Related Risk Indicators
Whether gross margins are improving or declining over five years. A positive trend means the company is gaining pricing power or reducing costs. Negative trends in a mature business are a warning sign.
Whether bottom-line profitability is improving or declining over five years. A positive trend indicates the business is becoming more profitable. The most durable improvement comes from expanding gross margins rather than cost-cutting.
The lowest ROIC recorded over five years. A company with a high minimum ROIC (above 10%) maintains strong returns even in bad years, indicating a genuinely strong business with a durable competitive advantage.
Measures the accrual component of earnings relative to total assets. When cash flow exceeds reported earnings, the company has high-quality earnings. Large accruals relative to assets are a red flag for potential manipulation.
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