For South Pacific Resources Limited’s (ASX:SPB) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures SPB’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, and the market as a whole 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.

View our latest analysis for South Pacific Resources

What is SPB’s market risk?

South Pacific Resources’s five-year beta of 1.66 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, SPB 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 SPB’s size and industry impact the expected beta?

SPB, with its market capitalisation of AU$2.48M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, SPB’s industry, oil and gas, 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 and gas industry, relative to those more well-established firms in a more defensive industry. This is consistent with SPB’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 SPB’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 SPB’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since SPB’s fixed assets are only 2.54% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts SPB’s current beta value which indicates an above-average volatility.