If you are looking to invest in New Talisman Gold Mines Limited’s (NZSE:NTL), 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. NTL 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. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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.
What does NTL’s beta value mean?
New Talisman Gold Mines’s beta of 0.79 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in NTL’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, NTL appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does NTL’s size and industry impact its risk?
NTL, with its market capitalisation of NZ$36.80M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, NTL 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. It seems as though there is an inconsistency in risks portrayed by NTL’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.
Is NTL’s cost structure indicative of a high 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 NTL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, NTL appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect NTL 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 NTL’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 NTL. 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, NTL may be a valuable stock to hold onto in order to cushion the impact of a downturn. What I have not mentioned in my article here are important company-specific fundamentals such as New Talisman Gold Mines’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is NTL’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.
- Past Track Record: Has NTL 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 NTL’s historicals for more clarity.
- 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.