If you are a shareholder in Battery Minerals Limited’s (ASX:BAT), 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 market as a whole 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 BAT
What does BAT's beta value mean?
Battery Minerals’s beta of 0.44 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in BAT'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. BAT'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 BAT's size and industry impact the expected beta?
A market capitalisation of AUD $29.67M puts BAT in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the metals and mining industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap BAT but a low beta for the metals and mining industry. This is an interesting conclusion, since both BAT’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can BAT'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 BAT’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, BAT seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of BAT indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts BAT’s current beta value which indicates a below-average volatility.