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If you are looking to invest in King River Copper Limited’s (ASX:KRC), 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. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Different characteristics of a stock expose it to various levels 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 King River Copper
What does KRC’s beta value mean?
With a beta of 4.72, King River Copper is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, KRC 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 KRC’s size and industry cause it to be more volatile?
With a market cap of AU$146.34M, KRC falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, KRC also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the metals and mining industry, relative to those more well-established firms in a more defensive industry. This is consistent with KRC’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How KRC’s assets could affect its 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 examine KRC’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, KRC 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 KRC 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, KRC’s beta value conveys the same message.