If you are looking to invest in Southern Hemisphere Mining Limited’s (ASX:SUH), 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. 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. 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

See our latest analysis for SUH

An interpretation of SUH's beta

Southern Hemisphere Mining's beta of 0.63 indicates that the stock value will be less variable compared to the whole stock market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, SUH appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Does SUH's size and industry impact the expected beta?

SUH, with its market capitalisation of AUD $14.85M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the metals and mining industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the metals and mining industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by SUH’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.

Can SUH's asset-composition point to a higher 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 examine SUH’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, SUH seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect SUH 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 is consistent with is current beta value which also indicates low volatility.

What this means for you:

Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto SUH. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.

Are you a potential investor? Before you buy SUH, you should look at the stock in conjunction with their current portfolio holdings. SUH may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment.

Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Southern Hemisphere Mining for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Southern Hemisphere Mining anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.