If you are a shareholder in New Century Resources Limited’s (ASX:NCZ), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. NCZ 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. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
View our latest analysis for New Century Resources
What does NCZ's beta value mean?
With a five-year beta of 0.66, New Century Resources 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. NCZ’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 NCZ's size and industry impact its risk?
NCZ, with its market capitalisation of AUD $402.19M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, NCZ 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 NCZ but a low beta for the metals and mining industry. This is an interesting conclusion, since both NCZ’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can NCZ's asset-composition point to a higher 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 NCZ’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%, NCZ 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 NCZ 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. This outcome contradicts NCZ’s current beta value which indicates a below-average volatility.