What You Must Know About Greenpower Energy Limited's (ASX:GPP) Risks

For Greenpower Energy Limited’s (ASX:GPP) 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 GPP. 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 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. 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.

An interpretation of GPP's beta

Greenpower Energy’s beta of 0 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, GPP appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Could GPP's size and industry cause it to be more volatile?

With a market cap of AU$14.62M, GPP falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, GPP also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap GPP but a low beta for the oil and gas industry. It seems as though there is an inconsistency in risks portrayed by GPP’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How GPP'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 GPP’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 a fixed to total assets ratio of over 30%, GPP seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect GPP 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 GPP’s actual beta value suggests, which is lower stock volatility relative to the market.

What this means for you:

GPP may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as GPP is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether GPP is a good investment for you, we also need to consider important company-specific fundamentals such as Greenpower Energy’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

• 1. Financial Health: Is GPP’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.
• 2. Past Track Record: Has GPP 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 GPP'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.