If you are a shareholder in Capricorn Metals Limited’s (ASX:CMM), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. CMM 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. 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. 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 Capricorn Metals

What does CMM's beta value mean?

Capricorn Metals has a beta of 2.37, 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, CMM 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 CMM's size and industry impact its risk?

With a market cap of AUD $48.65M, CMM falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, CMM also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the metals and mining industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of CMM’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

How CMM'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 test CMM’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, CMM appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect CMM 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 is consistent with is current beta value which also indicates high volatility.