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Should You Be Concerned About Prairie Mining Limited’s (ASX:PDZ) Risks?

For Prairie Mining Limited’s (ASX:PDZ) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as PDZ. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.

Not every stock is exposed to the same level of market risk. A popular measure of market risk for a stock is its beta, 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 PDZ

What does PDZ's beta value mean?

With a five-year beta of 0.19, Prairie Mining appears to be a less volatile company compared to the rest of the market. This means that the change in PDZ'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. PDZ’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.

ASX:PDZ Income Statement Sep 22nd 17
ASX:PDZ Income Statement Sep 22nd 17

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

PDZ, with its market capitalisation of AUD $103.01M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, PDZ also operates in the materials 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 materials 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 PDZ’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.

How PDZ's assets could affect its 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 PDZ’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since PDZ’s fixed assets are only 24.09% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect PDZ 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 could benefit from lower risk during times of economic decline by holding onto PDZ. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into PDZ.

Are you a potential investor? Before you buy PDZ, you should look at the stock in conjunction with their current portfolio holdings. PDZ 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 Prairie 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 Prairie 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.

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