For Azure Minerals Limited’s (ASX:AZS) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. AZS 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 Azure Minerals
What is AZS’s market risk?
With a five-year beta of 0.97, Azure Minerals appears to be a less volatile company compared to the rest of the market. This means that the change in AZS's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. AZS's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could AZS's size and industry cause it to be more volatile?
A market capitalisation of AUD $25.09M puts AZS in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, AZS 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. It seems as though there is an inconsistency in risks portrayed by AZS’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.
Can AZS'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 test AZS’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, AZS 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 AZS indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what AZS’s actual beta value suggests, which is lower stock volatility relative to the market.