Should You Have Maximus Resources Limited’s (ASX:MXR) In Your Portfolio?
For Maximus Resources Limited’s (ASX:MXR) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures MXR’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
Check out our latest analysis for Maximus Resources
An interpretation of MXR’s beta
Maximus Resources’s five-year beta of 1.63 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. Based on this beta value, MXR 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.
Could MXR’s size and industry cause it to be more volatile?
A market capitalisation of AU$3.03M puts MXR in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, MXR’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with MXR’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can MXR’s asset-composition point to a higher 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 test MXR’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, MXR seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect MXR 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. Similarly, MXR’s beta value conveys the same message.
What this means for you:
You may reap the gains of MXR’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 MXR is a good investment for you, we also need to consider important company-specific fundamentals such as Maximus Resources’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Financial Health: Is MXR’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 MXR 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 MXR’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.
