For Queensland Bauxite Limited’s (ASX:QBL) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. QBL is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the broad market index 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 Queensland Bauxite

An interpretation of QBL’s beta

Queensland Bauxite has a beta of 1.37, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, QBL 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.

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

A market capitalisation of AU$63.75M puts QBL in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, QBL’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 supports our interpretation of QBL’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

Is QBL’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 QBL’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 less than a third of the company’s total assets, QBL doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect QBL 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 QBL’s actual beta value suggests, which is higher stock volatility relative to the market.