If you are a shareholder in Batla Minerals SA’s (ENXTPA:MLBAT), 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 all stocks are expose to the same level of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
Check out our latest analysis for Batla Minerals
What does MLBAT’s beta value mean?
Batla Minerals’s beta of 0.89 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in MLBAT’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. MLBAT’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.
Does MLBAT’s size and industry impact the expected beta?
A market capitalisation of €7.17M puts MLBAT in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, MLBAT’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 a high beta for the small-cap MLBAT but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by MLBAT’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How MLBAT’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 MLBAT’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, MLBAT 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 MLBAT 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 MLBAT’s actual beta value suggests, which is lower stock volatility relative to the market.