If you are a shareholder in Barnwell Industries Inc’s (AMEX:BRN), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of 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 market as a whole represents a beta 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.

Check out our latest analysis for Barnwell Industries

What does BRN’s beta value mean?

With a beta of 1.71, Barnwell Industries is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, BRN 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.

How does BRN’s size and industry impact its risk?

With a market cap of US$17.05M, BRN falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the oil and gas 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 and gas industry, relative to those more well-established firms in a more defensive industry. This is consistent with BRN’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Is BRN’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 examine BRN’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since BRN’s fixed assets are only 16.58% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect BRN to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what BRN’s actual beta value suggests, which is higher stock volatility relative to the market.