How Does Investing In Buru Energy Limited (ASX:BRU) Impact Your Portfolio?

If you are a shareholder in Buru Energy Limited’s (ASX:BRU), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as BRU. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.

Not all stocks are expose to the same level of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

See our latest analysis for Buru Energy

An interpretation of BRU’s beta

Buru Energy’s five-year beta of 1.53 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, BRU may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.

ASX:BRU Income Statement May 1st 18
ASX:BRU Income Statement May 1st 18

Could BRU’s size and industry cause it to be more volatile?

A market capitalisation of AU$155.53M puts BRU in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, BRU also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with BRU’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

Can BRU’s asset-composition point to a higher 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 BRU’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, BRU appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of BRU indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, BRU’s beta value conveys the same message.

What this means for you:

You may reap the gains of BRU’s returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk. In order to fully understand whether BRU is a good investment for you, we also need to consider important company-specific fundamentals such as Buru Energy’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for BRU’s future growth? Take a look at our free research report of analyst consensus for BRU’s outlook.
  2. Past Track Record: Has BRU been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of BRU’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.