In This Article:
If you are a shareholder in Norwegian Energy Company AS’s (OB:NOR), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. NOR is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not all stocks are expose to the same level of market risk, 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.
See our latest analysis for Norwegian Energy Company
What does NOR’s beta value mean?
Norwegian Energy Company’s beta of 0.71 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. Based on this beta value, NOR appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does NOR’s size and industry impact the expected beta?
NOR, with its market capitalisation of ØRE1.07B, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, NOR also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. 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 NOR’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.
Can NOR’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 NOR’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets is virtually non-existent in NOR’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect NOR 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. Similarly, NOR’s beta value conveys the same message.