Golden Deeps Limited (ASX:GED): Risks You Need To Consider Before Buying

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If you are a shareholder in Golden Deeps Limited’s (ASX:GED), 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 every stock is exposed 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

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What does GED’s beta value mean?

Golden Deeps’s beta of 0.48 indicates that the stock value will be less variable compared to the whole stock 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. GED’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 GED’s size and industry impact its risk?

GED, with its market capitalisation of AU$6.60M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, GED’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap GED but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by GED’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

ASX:GED Income Statement Mar 3rd 18
ASX:GED Income Statement Mar 3rd 18

Can GED’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 examine GED’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. GED’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect GED 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. However, this is the opposite to what GED’s actual beta value suggests, which is lower stock volatility relative to the market.