For Broken Hill Prospecting Limited’s (ASX:BPL) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as BPL. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as BPL, because it is rare that an entire industry collapses at once. 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 every stock is exposed 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 Broken Hill Prospecting
What does BPL’s beta value mean?
Broken Hill Prospecting has a beta of 1.09, 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. Based on this beta value, BPL 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 BPL’s size and industry impact the expected beta?
With a market cap of AU$9.16M, BPL falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, BPL also operates in the metals and mining 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 BPL’s individual beta value we discussed above.
How BPL’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 examine BPL’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up an insignificant portion of total assets, BPL doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts BPL’s current beta value which indicates an above-average volatility.
What this means for you:
You could reap the gains of BPL’s returns in times of an economic boom. However, during a downturn, a more defensive stock can cushion the impact of this risk. Depending on the composition of your portfolio, high-beta stocks such as BPL is valuable to pump up your returns, in particular, during times of economic growth. What I have not mentioned in my article here are important company-specific fundamentals such as Broken Hill Prospecting’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is BPL’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 BPL 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 BPL’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.