For Force Commodities Limited’s (ASX:4CE) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact 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. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value 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.
View our latest analysis for Force Commodities
What is 4CE’s market risk?
Force Commodities has a beta of 1.68, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, 4CE 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.
Could 4CE's size and industry cause it to be more volatile?
With a market cap of AUD $9.67M, 4CE falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, 4CE’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of 4CE’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
How 4CE's assets could affect its 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 4CE’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, 4CE doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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. However, this is the opposite to what 4CE’s actual beta value suggests, which is higher stock volatility relative to the market.