If you are a shareholder in Maximus Resources Limited’s (ASX:MXR), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures MXR’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed 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.

See our latest analysis for MXR

What is MXR’s market risk?

Maximus Resources has a beta of 1.86, 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. According to this value of beta, MXR may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.

Could MXR's size and industry cause it to be more volatile?

A market capitalisation of AUD $3.03M puts MXR in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, MXR’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of MXR’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Can MXR's asset-composition point to a higher 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 test MXR’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. MXR'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 MXR 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. Similarly, MXR’s beta value conveys the same message.