If you are a shareholder in Carbine Resources Limited’s (ASX:CRB), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. CRB 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
View our latest analysis for Carbine Resources
What does CRB's beta value mean?
Carbine Resources’s beta of 0.22 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in CRB's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, CRB appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could CRB's size and industry cause it to be more volatile?
CRB, with its market capitalisation of AUD $13.60M, 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. As a result, we should expect a high beta for the small-cap CRB but a low beta for the metals and mining industry. This is an interesting conclusion, since both CRB’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How CRB'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 examine CRB’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 less than a third of the company’s total assets, CRB doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect CRB to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. Similarly, CRB’s beta value conveys the same message.