If you are a shareholder in Metgasco Limited’s (ASX:MEL), 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 MEL’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. 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 Metgasco

What does MEL’s beta value mean?

Metgasco 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, MEL 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.

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

A market capitalisation of AUD A$24.31M puts MEL in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, MEL also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. 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 MEL’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

How MEL’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 MEL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in MEL’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect MEL 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 MEL’s actual beta value suggests, which is higher stock volatility relative to the market.