Unleveraged beta (or asset beta) measures the company's market risk without the impact of debt. Since companies have different capital structures and debt levels, an analyst can calculate unlevered beta to effectively compare them with each other or with the market. Let's see what deleveraged beta is and how to interpret it.
What is deleveraged beta
As we explained previously, Beta is a measure of market risk. Unleveraged beta (or asset beta) measures the company's market risk without the impact of debt. By “deleveraging” a beta you eliminate the financial effects of leverage, thus isolating the risk due solely to the company's assets. In other words, how much the company's equity contributes to its risk profile.
What is the unleveraged beta for?
Beta is the slope of a stock's ratio compared to a market benchmark, such as the Standard & Poor's (S&P) 500 Index. A key determinant of beta is leverage, which measures a company's level of debt relative to with their own funds. A company's level of debt can affect its results, making it more sensitive to changes in its share price. Note that the company analyzed has debt on its financial statements, but the unlevered beta treats it as if it had no debt, eliminating any debt from the calculation. Since companies have different capital structures and debt levels, an analyst can calculate unlevered beta to effectively compare them with each other or with the market. In this way, only the sensitivity of a company's assets (own funds) to the market will be taken into account.
Unleveraged beta calculation formula
Leveraged beta measures the risk of a company with debt and equity in its capital structure against market volatility. The other type of beta is known as unleveraged beta. To "de-leverage" the beta, you must know the company's leveraged beta, in addition to the company's debt-to-equity ratio and the corporate tax rate.
Formula for calculating unleveraged beta.
Example of using deleveraged beta
For example, let's calculate Tesla's unleveraged beta:
- Beta (BL) is 0,73
- The debt/equity ratio (D/E) is 2,2
- The tax rate is 35%.
Example of calculating Tesla's unleveraged beta.
The unleveraged beta is almost always equal to or lower than the leveraged beta, since the debt will almost always be zero or positive. If the unlevered beta is positive, investors will invest in the company's stock when prices are expected to rise. A negative unleveraged beta will cause investors to invest in the stock when prices are expected to decline.