If you are looking to invest in Metal Bank Limited’s (ASX:MBK), 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. MBK is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and 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. 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.
Check out our latest analysis for Metal Bank
An interpretation of MBK's beta
With a beta of 1.58, Metal Bank is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, MBK can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Does MBK's size and industry impact the expected beta?
A market capitalisation of AUD $17.13M puts MBK in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, MBK also operates in the metals and mining industry, which has commonly demonstrated strong reactions 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. This supports our interpretation of MBK’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can MBK'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 MBK’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. MBK'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. As a result, this aspect of MBK indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, MBK’s beta value conveys the same message.