For Bandera Gold Ltd’s (TSXV:BGL) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta 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.
What is BGL’s market risk?
With a five-year beta of 0.4, Bandera Gold 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. BGL’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 BGL’s size and industry impact the expected beta?
A market capitalisation of CA$514.60K puts BGL in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, BGL 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 BGL but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by BGL’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 BGL’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 BGL’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%, BGL 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 BGL 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. However, this is the opposite to what BGL’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
BGL may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as BGL is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether BGL is a good investment for you, we also need to consider important company-specific fundamentals such as Bandera Gold’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
1. Financial Health: Is BGL’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 BGL 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 BGL’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.