Infinite Lithium Corp (CVE:ILI): How Does It Impact Your Portfolio?
For Infinite Lithium Corp’s (TSXV:ILI) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. ILI 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. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta 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.
View our latest analysis for Infinite Lithium
What does ILI’s beta value mean?
With a beta of 3.02, Infinite Lithium is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, ILI will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
How does ILI’s size and industry impact its risk?
ILI, with its market capitalisation of CA$12.97M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, ILI’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 ILI’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How ILI’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 ILI’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, ILI appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of ILI indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, ILI’s beta value conveys the same message.
What this means for you:
You may reap the gains of ILI’s returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk. In order to fully understand whether ILI is a good investment for you, we also need to consider important company-specific fundamentals such as Infinite Lithium’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 ILI’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 ILI 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 ILI’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.
