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If you are a shareholder in Xstate Resources Limited’s (ASX:XST), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. XST 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 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.
See our latest analysis for Xstate Resources
What does XST’s beta value mean?
With a beta of 2.68, Xstate 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, XST may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
How does XST’s size and industry impact its risk?
With a market cap of AU$7.05M, XST falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, XST 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. This supports our interpretation of XST’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How XST’s assets could affect its 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 XST’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up an insignificant portion of total assets, XST doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. However, this is the opposite to what XST’s actual beta value suggests, which is higher stock volatility relative to the market.