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What You Must Know About African Gold Group Inc’s (TSXV:AGG) Risks

If you are a shareholder in African Gold Group Inc’s (TSXV:AGG), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of 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 all stocks are expose to the same level 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.

See our latest analysis for AGG

What is AGG’s market risk?

African Gold Group has a beta of 3.06, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, AGG can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.

Could AGG's size and industry cause it to be more volatile?

With a market cap of CAD $25.17M, AGG falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the metals and mining industry, which has been found to have high sensitivity to market-wide shocks. 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 supports our interpretation of AGG’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

TSXV:AGG Income Statement Sep 30th 17
TSXV:AGG Income Statement Sep 30th 17

Can AGG'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 examine AGG’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, AGG 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 AGG 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, AGG’s beta value conveys the same message.

What this means for you:

Are you a shareholder? You could benefit from higher returns from AGG during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. However, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand.

Are you a potential investor? I recommend that you look into AGG's fundamental factors such as its current valuation and financial health as well. 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. AGG may be a great investment during times of economic growth.

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 African Gold Group 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 African Gold Group 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.

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