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If you are looking to invest in Interra Resources Limited’s (SGX:5GI), 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 5GI’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, and the broad market index 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.
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What does 5GI’s beta value mean?
Interra Resources’s five-year beta of 2.81 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, 5GI 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.
Does 5GI’s size and industry impact the expected beta?
5GI, with its market capitalisation of S$33.99M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, 5GI’s industry, oil and gas, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with 5GI’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is 5GI’s cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test 5GI’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%, 5GI 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 5GI indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, 5GI’s beta value conveys the same message.