All You Need To Know About Octanex Limited’s (ASX:OXX) Risks

If you are a shareholder in Octanex Limited’s (ASX:OXX), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of OXX. 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. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

Check out our latest analysis for Octanex

What is OXX’s market risk?

With a beta of 2, Octanex is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, OXX will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.

ASX:OXX Income Statement Dec 4th 17
ASX:OXX Income Statement Dec 4th 17

Does OXX’s size and industry impact the expected beta?

With a market cap of AUD A$24.27M, OXX falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, OXX also operates in the oil, gas and consumable fuels industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil, gas and consumable fuels industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of OXX’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

Is OXX’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 OXX’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. OXX’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. As a result, this aspect of OXX indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, OXX’s beta value conveys the same message.

What this means for you:

Are you a shareholder? You could benefit from higher returns from OXX 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? I recommend that you look into OXX’s fundamental factors such as its current valuation and financial health as well. 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. OXX may be a great investment during times of economic growth.

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 Octanex 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 Octanex anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.