If you are looking to invest in Katanga Mining Limited’s (TSX:KAT), 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. There are two types of risks that affect the market value of a listed company such as KAT. 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 other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Different characteristics of a stock expose it to various levels 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 Katanga Mining
An interpretation of KAT’s beta
Katanga Mining’s beta of 0.99 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. KAT’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 KAT’s size and industry cause it to be more volatile?
KAT has a market capitalization of CA$3.43B, putting it in the category of established companies, which are found to experience less relative risk compared to small-sized companies. However, KAT operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a low beta for the large-cap nature of KAT but a higher beta for the metals and mining industry. This is an interesting conclusion, since its industry suggests KAT should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is KAT’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 test KAT’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, KAT seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of KAT 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 KAT’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
KAT 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 KAT is valuable to lower your risk of market exposure, in particular, during times of economic decline. What I have not mentioned in my article here are important company-specific fundamentals such as Katanga Mining’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is KAT’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 KAT 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 KAT’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.