If you are looking to invest in Greenvale Energy Limited’s (ASX:GRV), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Broadly speaking, there are two types of risk you should consider when investing in stocks such as GRV. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Not all stocks are expose to the same level of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole 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 Greenvale Energy
An interpretation of GRV’s beta
With a five-year beta of 0.53, Greenvale Energy appears to be a less volatile company compared to the rest of the market. This means that the change in GRV’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. GRV’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Could GRV’s size and industry cause it to be more volatile?
With a market cap of AU$3.27M, GRV falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, GRV’s industry, oil and gas, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil and gas industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both GRV’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How GRV’s assets could affect its beta
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test GRV’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, GRV appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect GRV 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. However, this is the opposite to what GRV’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto GRV. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, GRV may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether GRV is a good investment for you, we also need to consider important company-specific fundamentals such as Greenvale Energy’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is GRV’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has GRV 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 GRV’s historicals for more clarity.
- 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.