If you are a shareholder in Wolf Minerals Limited’s (ASX:WLF), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 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. 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.
See our latest analysis for Wolf Minerals
What is WLF’s market risk?
Wolf Minerals’s five-year beta of 1.4 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, WLF may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Could WLF’s size and industry cause it to be more volatile?
WLF, with its market capitalisation of AU$59.92M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, WLF also operates in the metals and mining industry, which has commonly demonstrated strong reactions 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 WLF’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Is WLF’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 examine WLF’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%, WLF appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of WLF indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, WLF’s beta value conveys the same message.