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If you are a shareholder in Baraka Energy & Resources Ltd’s (ASX:BKP), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures BKP’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 Baraka Energy & Resources
What does BKP’s beta value mean?
With a beta of 3.05, Baraka Energy & Resources is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, BKP can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Does BKP’s size and industry impact the expected beta?
With a market cap of AU$2.35M, BKP falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, BKP also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of BKP’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can BKP’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 BKP’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%, BKP 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 BKP indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, BKP’s beta value conveys the same message.