Unlevered Beta / Asset Beta

Guide to unlevered beta (asset beta), how to calculate it, and what it's used for.

What is unlevered beta?

Unlevered beta (a.k.a. Asset Beta) is the beta of a company without the impact of debt. It is also known as the volatility of returns for a company, without taking into account its financial leverage. It compares the risk of an unlevered company to the risk of the market. It is also commonly referred to as “asset beta” because the volatility of a company without any leverage is the result of only its assets.  Let’s compare that to levered beta.

Conversely, levered beta (or “equity beta”) is a measurement that compares the volatility of returns a company’s stock against those of the broader market. In other words, it’s a measure of risk. Equity beta allows investors to gauge how sensitive a security might be to macro-market risks.  For example, a company with a beta of 1.5 has returns that are 150% as volatile as the market it’s being compared to.

 

asset beta formula (unlevered beta)

When you look up a company’s beta on Bloomberg the number you see is levered to reflect the debt of that company. However, each company’s capital structure is different and we want to look at how “risky” a company is regardless of what percentage of debt or equity it has.

The higher a company’s debt/leverage, the more earnings from the company that are committed to servicing that debt. As a company adds more and more debt, the company’s uncertainty of future earnings is also increasing. This increases the risk associated with the company’s stock, but, it is not an aspect of market risk. Therefore, subtracting the financial leverage (debt impact), the beta can capture the risk of just the company’s assets.

 

How do you calculate unlevered beta / asset beta?

To determine the risk of a company without debt, we need to un-lever the beta (i.e. remove the debt impact).

To do this you look up the beta for a group of comparable companies within the same industry, un-lever each one, take the median of the set, and then lever it based on your company’s capital structure.

Then you use this Levered Beta in the cost of equity calculation.

 

For your reference, the formulas for un-levering and re-levering Beta are below:

Unlevered Beta = Levered Beta / (1 + ((1 – Tax Rate) x (Total Debt/Equity)))

Levered Beta = Unlevered Beta x (1 + ((1 – Tax Rate) x (Total Debt/Equity)))

 

If the unlevered beta is positive, investors will want to invest in it when prices are expected to rise. If the unlevered beta calculation is negative, investors will want to invest in it when prices are expected to fall.

 

What is asset beta used for?

Asset beta is used to measure the risk of a security minus the company’s debt.

It is best to use asset beta when either a company or an investor wants to measure a company’s performance in relation to the market without the impact of a company’s debt.

In relation to levered beta, asset beta takes out the impact of a company’s debt. This makes it naturally lower than levered beta and in turn, it is more accurate in measuring its volatility and performance in the market as a whole.

Asset beta is commonly used in financial modeling and business valuation for professionals working in investment banking or equity research.

 

Additional resources

We hope this has been a helpful guide to unlevered beta / asset beta and encourage you to keep building your corporate finance knowledge.

More helpful resources on the topic include: