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

An interpretation of MDX’s beta

With a five-year beta of 0.88, Mindax appears to be a less volatile company compared to the rest of the 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. MDX’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.

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

A market capitalisation of AU$3.34M puts MDX in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, MDX also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap MDX but a low beta for the metals and mining industry. This is an interesting conclusion, since both MDX’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Can MDX’s asset-composition point to a higher 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 MDX’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%, MDX 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 MDX indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what MDX’s actual beta value suggests, which is lower stock volatility relative to the market.