For Kina Petroleum Limited’s (ASX:KPL) 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 KPL’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level 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 Kina Petroleum

What does KPL’s beta value mean?

With a five-year beta of 0.11, Kina Petroleum appears to be a less volatile company compared to the rest of the market. This means that the change in KPL’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. KPL’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.

Does KPL’s size and industry impact the expected beta?

A market capitalisation of AUD A$25.85M puts KPL in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, KPL’s industry, oil, gas and consumable fuels, 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 KPL but a low beta for the oil, gas and consumable fuels industry. It seems as though there is an inconsistency in risks portrayed by KPL’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

Is KPL’s cost structure indicative of a high 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 examine KPL’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. KPL’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 KPL 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. This outcome contradicts KPL’s current beta value which indicates a below-average volatility.

What this means for you:

Are you a shareholder? KPL may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as KPL is valuable to lower your risk of market exposure, in particular, during times of economic decline. For next steps, take a look at KPL’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.

Are you a potential investor? Before you buy KPL, you should look at the stock in conjunction with their current portfolio holdings. KPL may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping into the investment. You can examine these factors in our free fundamental research report for KPL here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.