If you are looking to invest in New Age Exploration Limited’s (ASX:NAE), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. The beta measures NAE’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole 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.
See our latest analysis for NAE
What does NAE's beta value mean?
New Age Exploration's beta of 0.64 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. NAE'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 NAE's size and industry impact the expected beta?
A market capitalisation of AUD $4.06M puts NAE in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the oil, gas and consumable fuels industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil, gas and consumable fuels 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 NAE’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.
Is NAE's cost structure indicative of a high 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 NAE’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, NAE seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of NAE indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts NAE’s current beta value which indicates a below-average volatility.