If you are looking to invest in Viking Mines Limited’s (ASX:VKA), 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. The beta measures VKA’s exposure to the wider market risk, which reflects changes in economic and political factors. 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.

Check out our latest analysis for Viking Mines

What does VKA’s beta value mean?

Viking Mines’s five-year beta of 2.08 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, VKA can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.

Could VKA’s size and industry cause it to be more volatile?

A market capitalisation of AU$8.47M puts VKA in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, VKA’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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 VKA’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

How VKA’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 examine VKA’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since VKA’s fixed assets are only 6.48% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect VKA 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. This outcome contradicts VKA’s current beta value which indicates an above-average volatility.