If you are looking to invest in Australian Vanadium Limited’s (ASX:AVL), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. AVL 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 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.
An interpretation of AVL’s beta
Australian Vanadium’s beta of 0.94 indicates that the stock value will be less variable compared to the whole stock 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. AVL’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
How does AVL’s size and industry impact its risk?
AVL, with its market capitalisation of AU$79.43M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, AVL 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 AVL but a low beta for the metals and mining industry. This is an interesting conclusion, since both AVL’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is AVL’s cost structure indicative of a high 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 AVL’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%, AVL 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 AVL 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 AVL’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
AVL 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 AVL is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether AVL is a good investment for you, we also need to consider important company-specific fundamentals such as Australian Vanadium’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is AVL’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 AVL 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 AVL’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.