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If you are a shareholder in Arc Minerals Ltd’s (AIM:ARCM), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures ARCM’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed 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.
See our latest analysis for Arc Minerals
An interpretation of ARCM’s beta
With a five-year beta of 0.99, Arc Minerals appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. ARCM’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does ARCM’s size and industry impact its risk?
With a market cap of UK£2.56M, ARCM falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, ARCM 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 ARCM but a low beta for the metals and mining industry. This is an interesting conclusion, since both ARCM’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.
Is ARCM’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 ARCM’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since ARCM’s fixed assets are only 1.42% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, ARCM’s beta value conveys the same message.