What Are The Drivers Of MGX Minerals Inc’s (FRA:1MG) Risks?
If you are a shareholder in MGX Minerals Inc’s (DB:1MG), 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 1MG’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. 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 MGX Minerals
What does 1MG’s beta value mean?
MGX Minerals’s five-year beta of 3.87 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, 1MG may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
How does 1MG’s size and industry impact its risk?
A market capitalisation of €56.49M puts 1MG in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, 1MG’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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. This supports our interpretation of 1MG’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How 1MG’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 examine 1MG’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, 1MG seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect 1MG 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 outcome contradicts 1MG’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of 1MG’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into 1MG. What I have not mentioned in my article here are important company-specific fundamentals such as MGX Minerals’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 1MG’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.
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.
