If you are a shareholder in AVZ Minerals Limited’s (ASX:AVZ), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. AVZ 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. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole 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.
View our latest analysis for AVZ Minerals
An interpretation of AVZ’s beta
AVZ Minerals’s beta of 0.79 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. AVZ’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 AVZ’s size and industry cause it to be more volatile?
AVZ, with its market capitalisation of AUD A$411.15M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the metals and mining industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the metals and mining industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both AVZ’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.
Is AVZ’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 examine AVZ’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, AVZ appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect AVZ to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. However, this is the opposite to what AVZ’s actual beta value suggests, which is lower stock volatility relative to the market.