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If you are a shareholder in Antilles Oil and Gas NL’s (ASX:AVD), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures AVD’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 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.
View our latest analysis for Antilles Oil and Gas
What does AVD’s beta value mean?
With a beta of 1.11, Antilles Oil and Gas 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. Based on this beta value, AVD may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Could AVD’s size and industry cause it to be more volatile?
AVD, with its market capitalisation of AU$3.74M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, AVD also operates in the oil and gas 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 oil and gas industry, relative to those more well-established firms in a more defensive industry. This is consistent with AVD’s individual beta value we discussed above.
Can AVD’s asset-composition point to a higher 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 AVD’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in AVD’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect AVD 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 AVD’s current beta value which indicates an above-average volatility.