All You Need To Know About Metro Mining Limited’s (ASX:MMI) Risks
If you are a shareholder in Metro Mining Limited’s (ASX:MMI), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as MMI. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Not all stocks are expose to the same level of market risk. A widely-used metric to measure a stock's market risk is beta, and the broad market index represents a beta value 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.
View our latest analysis for Metro Mining
An interpretation of MMI's beta
Metro Mining’s beta of 0.64 indicates that the company is less volatile relative to the diversified market portfolio.This means that the change in MMI'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, MMI 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 MMI's size and industry impact its risk?
MMI, with its market capitalisation of AUD $231.39M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, MMI also operates in the energy industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap MMI but a low beta for the energy industry. This is an interesting conclusion, since both MMI’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can MMI's asset-composition point to a higher 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 MMI’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%, MMI 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 MMI 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 MMI’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto MMI. 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, MMI may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Before you buy MMI, you should look at the stock in conjunction with their current portfolio holdings. MMI 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.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Metro Mining for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Metro Mining anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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.
