If you are looking to invest in Centennial Mining Limited’s (ASX:CTL), 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. CTL 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. 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.

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An interpretation of CTL's beta

Centennial Mining's beta of 0.1 indicates that the stock value will be less variable compared to the whole stock market. 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, CTL 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 CTL's size and industry impact its risk?

CTL, with its market capitalisation of AUD $11.29M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, CTL 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 CTL but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by CTL’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.

Can CTL'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 CTL’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 a fixed to total assets ratio of over 30%, CTL seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of CTL indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts CTL’s current beta value which indicates a below-average volatility.