What You Must Know About Eclipse Metals Limited’s (ASX:EPM) Market Risks
If you are looking to invest in Eclipse Metals Limited’s (ASX:EPM), 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. The beta measures EPM’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole 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.
See our latest analysis for Eclipse Metals
What is EPM’s market risk?
Eclipse Metals’s beta of 0.93 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in EPM’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. EPM’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 EPM’s size and industry impact the expected beta?
A market capitalisation of AU$6.86M puts EPM in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the oil and gas industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap EPM but a low beta for the oil and gas industry. This is an interesting conclusion, since both EPM’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 EPM’s cost structure indicative of a high 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 EPM’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%, EPM 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 EPM 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. This outcome contradicts EPM’s current beta value which indicates a below-average volatility.
What this means for you:
EPM 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 EPM is valuable to lower your risk of market exposure, in particular, during times of economic decline. What I have not mentioned in my article here are important company-specific fundamentals such as Eclipse Metals’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Financial Health: Is EPM’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 EPM 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 EPM’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.
