If you are a shareholder in Carpentaria Resources Limited’s (ASX:CAP), 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 CAP. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as CAP, 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 all stocks are expose to the same level of market risk. The most widely used metric to quantify a stock’s market risk is beta, and the market as a whole represents a beta 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 Carpentaria Resources
An interpretation of CAP’s beta
Carpentaria Resources’s beta of 0.62 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, CAP appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could CAP’s size and industry cause it to be more volatile?
CAP, with its market capitalisation of AU$15.14M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, CAP’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 a high beta for the small-cap CAP but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by CAP’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can CAP’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 CAP’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%, CAP 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 CAP indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what CAP’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 CAP. 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, CAP may be a valuable stock to hold onto in order to cushion the impact of a downturn. What I have not mentioned in my article here are important company-specific fundamentals such as Carpentaria Resources’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is CAP’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 CAP 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 CAP’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.