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If you are a shareholder in Venus Metals Corporation Limited’s (ASX:VMC), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 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.
See our latest analysis for Venus Metals
What does VMC’s beta value mean?
Venus Metals’s beta of 0.22 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in VMC’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. VMC’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 VMC’s size and industry cause it to be more volatile?
VMC, with its market capitalisation of AU$8.44M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, VMC 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 VMC’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 VMC’s assets could affect its 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 VMC’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%, VMC 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 VMC 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 VMC’s actual beta value suggests, which is lower stock volatility relative to the market.