If you are a shareholder in Calima Energy Limited’s (ASX:CE1), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. CE1 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 broad market index represents a beta value 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 CE1

What is CE1’s market risk?

Calima Energy’s beta of 0.8 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, CE1 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

How does CE1’s size and industry impact its risk?

CE1, with its market capitalisation of AUD A$27.46M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, CE1’s industry, oil, gas and consumable fuels, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil, gas and consumable fuels industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by CE1’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

Can CE1’s asset-composition point to a higher 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 CE1’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up an insignificant portion of total assets, CE1 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect CE1 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, CE1’s beta value conveys the same message.

What this means for you:

Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto CE1. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into CE1. For more company-specific research on CE1, check out our our free analysis plaform here.

Are you a potential investor? Before you buy CE1, you should look at the stock in conjunction with their current portfolio holdings. CE1 may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment. You can examine these factors in our free fundamental research report for CE1 here.

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.