For Odin Metals Limited’s (ASX:ODM) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact 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 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.

View our latest analysis for Odin Metals

What is ODM’s market risk?

Odin Metals’s beta of 0.55 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in ODM’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. Based on this beta value, ODM appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Does ODM’s size and industry impact the expected beta?

A market capitalisation of AUD A$47.16M puts ODM in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, ODM’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap ODM but a low beta for the metals and mining industry. This is an interesting conclusion, since both ODM’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Can ODM’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 ODM’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, ODM 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 ODM indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what ODM’s actual beta value suggests, which is lower stock volatility relative to the market.