How Does Investing In Kore Potash Limited (ASX:K2P) Impact Your Portfolio?
If you are a shareholder in Kore Potash Limited’s (ASX:K2P), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures K2P’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the broad market index 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.
Check out our latest analysis for Kore Potash
What is K2P’s market risk?
With a five-year beta of 0.49, Kore Potash appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. K2P’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.
Does K2P’s size and industry impact the expected beta?
With a market cap of AUD A$107.54M, K2P falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, K2P also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap K2P but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by K2P’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.
Can K2P’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 K2P’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. K2P’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 K2P indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts K2P’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto K2P. 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, K2P may be a valuable stock to hold onto in order to cushion the impact of a downturn. For more company-specific research on K2P, check out our our free analysis plaform here.
Are you a potential investor? Before you buy K2P, you should look at the stock in conjunction with their current portfolio holdings. K2P may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping into the investment. You can examine these factors in our free fundamental research report for K2P 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.
