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If you are a shareholder in Resource Mining Corporation Limited’s (ASX:RMI), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. RMI 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. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
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An interpretation of RMI’s beta
Resource Mining’s beta of 0.59 indicates that the company is less volatile relative to the diversified market portfolio. 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. RMI’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.
Could RMI’s size and industry cause it to be more volatile?
With a market cap of AU$5.93M, RMI falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, RMI’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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 is an interesting conclusion, since both RMI’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.
How RMI’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 RMI’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%, RMI appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of RMI 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 RMI’s actual beta value suggests, which is lower stock volatility relative to the market.