If you are looking to invest in Golden Deeps Limited’s (ASX:GED), 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. Not every stock is exposed to the same level 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.
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An interpretation of GED's beta
Golden Deeps's beta of 0.14 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in GED'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. GED'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.
How does GED's size and industry impact its risk?
GED, with its market capitalisation of AUD $4.14M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, GED’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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. This is an interesting conclusion, since both GED’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 GED'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 test GED’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. GED's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect GED to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts GED’s current beta value which indicates a below-average volatility.