If you are a shareholder in Alicanto Minerals Limited’s (ASX:AQI), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. AQI 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 every stock is exposed to the same level of market risk, and the broad market index represents a beta value 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 AQI

An interpretation of AQI's beta

Alicanto Minerals’s five-year beta of 2.01 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, AQI can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.

Does AQI's size and industry impact the expected beta?

A market capitalisation of AUD $14.59M puts AQI in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, AQI also operates in the metals and mining industry, which has commonly demonstrated strong reactions 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 is consistent with AQI’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Can AQI's asset-composition point to a higher 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 test AQI’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%, AQI appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect AQI to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. Similarly, AQI’s beta value conveys the same message.

What this means for you:

Are you a shareholder? You may reap the gains of AQI's returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk.

Are you a potential investor? Before you buy AQI, you should factor how your portfolio currently moves with the wider market, and where we are in the economic cycle. This stock could be an outperformer during times of growth, and it may be worth taking a deeper dive into the fundamentals to crystalize your thoughts on AQI.

Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Alicanto Minerals for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Alicanto Minerals anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.