If you are looking to invest in Flinders Mines Limited’s (ASX:FMS), 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. The beta measures FMS’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
View our latest analysis for Flinders Mines
What is FMS’s market risk?
Flinders Mines has a beta of 2.3, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, FMS will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could FMS’s size and industry cause it to be more volatile?
A market capitalisation of AU$262.62M puts FMS in the category of small-cap stocks, which tends to possess higher beta than larger companies. 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 higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with FMS’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is FMS’s cost structure indicative of a high 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 test FMS’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%, FMS 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 FMS 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, FMS’s beta value conveys the same message.