For Havilah Resources Limited’s (ASX:HAV) 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 every stock is exposed to the same level of market risk, and the market as a whole represents a beta 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.

View our latest analysis for Havilah Resources

What does HAV’s beta value mean?

With a five-year beta of 1, Havilah Resources appears to be a less volatile company compared to the rest of the market. This means that the change in HAV’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. HAV’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.

How does HAV’s size and industry impact its risk?

With a market cap of AU$46.91M, HAV falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, HAV’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 HAV but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by HAV’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

How HAV’s assets could affect its 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 HAV’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%, HAV seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect HAV 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 HAV’s current beta value which indicates a below-average volatility.

What this means for you:

You could benefit from lower risk during times of economic decline by holding onto HAV. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, HAV may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether HAV is a good investment for you, we also need to consider important company-specific fundamentals such as Havilah Resources’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Is HAV’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

2. Past Track Record: Has HAV been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of HAV’s historicals for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.