If you are looking to invest in Pilot Energy Limited’s (ASX:PGY), 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. 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.

View our latest analysis for Pilot Energy

What is PGY’s market risk?

With a beta of 6.49, Pilot Energy 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. According to this value of beta, PGY 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.

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

PGY, with its market capitalisation of AUD A$2.99M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the oil, gas and consumable fuels industry, which has been found to have high sensitivity to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of PGY’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

How PGY’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 PGY’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up an insignificant portion of total assets, PGY doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect PGY 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 PGY’s actual beta value suggests, which is higher stock volatility relative to the market.

What this means for you:

Are you a shareholder? You could benefit from higher returns during times of economic growth by holding onto PGY. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into PGY. For next steps, take a look at PGY’s outlook to see what analysts are expecting for the stock on our free analysis plaform here.

Are you a potential investor? I recommend that you look into PGY’s fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. PGY may be a great investment during times of economic growth. You can examine these factors in our free fundamental research report for PGY here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.