If you are looking to invest in WPG Resources Ltd’s (ASX:WPG), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not every stock is exposed to the same level of market risk, and the broad market index represents a beta value 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 WPG Resources
An interpretation of WPG’s beta
WPG Resources’s beta of 0.2 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, WPG appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does WPG’s size and industry impact the expected beta?
With a market cap of AU$26.31M, WPG falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, WPG also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. 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. It seems as though there is an inconsistency in risks portrayed by WPG’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How WPG’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 WPG’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%, WPG appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect WPG 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. This outcome contradicts WPG’s current beta value which indicates a below-average volatility.