If you are looking to invest in Legacy Iron Ore Limited’s (ASX:LCY), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. The beta measures LCY’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
Check out our latest analysis for Legacy Iron Ore
An interpretation of LCY's beta
Legacy Iron Ore has a beta of 2.17, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, LCY will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could LCY's size and industry cause it to be more volatile?
A market capitalisation of AUD $4.40M puts LCY in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the metals and mining industry, which has been found to have high sensitivity 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 LCY’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can LCY'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 LCY’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, LCY appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of LCY indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, LCY’s beta value conveys the same message.