For Terramin Australia Limited’s (ASX:TZN) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as TZN. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as TZN, because it is rare that an entire industry collapses at once. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.

Not all stocks are expose to the same level of market risk. A popular measure of market risk for a stock is its beta, 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.

See our latest analysis for TZN

An interpretation of TZN's beta

With a beta of 1.1, Terramin Australia is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn.Based on this beta value,TZN will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.

How does TZN's size and industry impact its risk?

With a market cap of AUD $318.73M, TZN falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, TZN also operates in the materials 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 is consistent with TZN’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Is TZN's cost structure indicative of a high 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 TZN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint.TZN'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 TZN 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, TZN’s beta value conveys the same message.