If you are looking to invest in Polo Resources Limited’s (AIM:POL), 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. Generally, an investor should consider two types of risk that impact the market value of POL. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as POL, because it is rare that an entire industry collapses at once. 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.
Not all stocks are expose to the same level of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.Check out our latest analysis for Polo Resources
What does POL’s beta value mean?
Polo Resources’s beta of 0.6 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in POL’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, POL appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could POL’s size and industry cause it to be more volatile?
A market capitalisation of UK£13.00M puts POL in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, POL’s industry, oil and gas, 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 POL but a low beta for the oil and gas industry. This is an interesting conclusion, since both POL’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can POL’s asset-composition point to a higher 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 POL’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since POL’s fixed assets are only 3.81% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect POL to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You may reap the benefit of muted movements during times of economic decline by holding onto POL. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. In order to fully understand whether POL is a good investment for you, we also need to consider important company-specific fundamentals such as Polo 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 POL’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 POL 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 POL’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.