If you are a shareholder in Havilah Resources Limited’s (ASX:HAV), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. HAV 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 market as a whole represents a beta 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.
See our latest analysis for Havilah Resources
What is HAV’s market risk?
With a five-year beta of 0.98, Havilah 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. HAV’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 HAV’s size and industry impact its risk?
With a market cap of AUD A$51.25M, HAV falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, HAV 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 HAV but a low beta for the metals and mining industry. This is an interesting conclusion, since both HAV’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 HAV’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 test HAV’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. HAV’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. As a result, this aspect of HAV 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 HAV’s actual beta value suggests, which is lower stock volatility relative to the market.