If you are looking to invest in Kogi Iron Limited’s (ASX:KFE), 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. KFE 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

Check out our latest analysis for Kogi Iron

What is KFE’s market risk?

Kogi Iron’s beta of 0.58 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in KFE’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. KFE’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.

Could KFE’s size and industry cause it to be more volatile?

KFE, with its market capitalisation of AU$60.60M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, KFE’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap KFE but a low beta for the metals and mining industry. This is an interesting conclusion, since both KFE’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is KFE’s cost structure indicative of a high 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 KFE’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets is virtually non-existent in KFE’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect KFE 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, KFE’s beta value conveys the same message.