If you are looking to invest in Tap Oil Limited’s (ASX:TAP), 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. TAP 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
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What does TAP’s beta value mean?
Tap Oil has a beta of 1.89, 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, TAP 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 TAP’s size and industry impact the expected beta?
With a market cap of AU$31.10M, TAP falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, TAP’s industry, oil and gas, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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 TAP’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can TAP’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 TAP’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, TAP seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect TAP 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, TAP’s beta value conveys the same message.