If you are a shareholder in Ark Mines Limited's ( ASX:AHK ), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures AHK's exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
Check out our latest analysis for Ark Mines
What is AHK's market risk?
Ark Mines has a beta of 1.18, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, AHK can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Does AHK's size and industry impact the expected beta?
A market capitalisation of AUD $3.93M puts AHK in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, AHK's industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with AHK's individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is AHK's cost structure indicative of a high beta?
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine AHK's ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. AHK's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect AHK to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. Similarly, AHK's beta value conveys the same message.
What this means for you:
Are you a shareholder?You could benefit from higher returns from AHK during times of economic growth. Its higher fixed cost isn't a major concern given margins are covered with high consumer demand. However, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand.
Are you a potential investor?Before you buy AHK, you should factor how your portfolio currently moves with the wider market, and where we are in the economic cycle. This stock could be an outperformer during times of growth, and it may be worth taking a deeper dive into the fundamentals to crystalize your thoughts on AHK.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Ark Mines for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Ark Mines anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential .
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
