For Challenger Energy Limited’s (ASX:CEL) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures CEL’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the broad market index 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 Challenger Energy
What is CEL’s market risk?
Challenger Energy’s beta of 0.54 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in CEL’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. CEL’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.
Does CEL’s size and industry impact the expected beta?
CEL, with its market capitalisation of AUD A$6.23M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, CEL’s industry, oil and gas, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil and gas industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by CEL’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 CEL’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 test CEL’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%, CEL 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 CEL indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts CEL’s current beta value which indicates a below-average volatility.