For White Cliff Minerals Limited’s (ASX:WCN) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. WCN 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 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.

View our latest analysis for White Cliff Minerals

What is WCN’s market risk?

White Cliff Minerals’s beta of 0.21 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, WCN appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

How does WCN’s size and industry impact its risk?

A market capitalisation of AUD A$11.60M puts WCN in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, WCN also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap WCN but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by WCN’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.

How WCN’s assets could affect its 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 test WCN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. WCN’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect WCN 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 WCN’s actual beta value suggests, which is lower stock volatility relative to the market.