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What You Must Know About Fortuna Silver Mines Inc.'s (TSE:FVI) Beta Value

Simply Wall St

If you own shares in Fortuna Silver Mines Inc. (TSE:FVI) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.

Some stocks mimic the volatility of the market quite closely, while others demonstrate muted, exagerrated or uncorrelated price movements. Beta is a widely used metric to measure a stock's exposure to market risk (volatility). Before we go on, it's worth noting that Warren Buffett pointed out in his 2014 letter to shareholders that 'volatility is far from synonymous with risk.' Having said that, beta can still be rather useful. The first thing to understand about beta is that the beta of the overall market is one. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.

Check out our latest analysis for Fortuna Silver Mines

What we can learn from FVI's beta value

Given that it has a beta of 1.31, we can surmise that the Fortuna Silver Mines share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Fortuna Silver Mines shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see Fortuna Silver Mines's revenue and earnings in the image below.

TSX:FVI Income Statement, September 10th 2019

Does FVI's size influence the expected beta?

Fortuna Silver Mines is a small cap stock with a market capitalisation of CA$765m. Most companies this size are actively traded. It's not particularly surprising that it has a higher beta than the overall market. That's because it takes less money to influence the share price of a smaller company, than a bigger company.

What this means for you:

Since Fortuna Silver Mines tends to moves up when the market is going up, and down when it's going down, potential investors may wish to reflect on the overall market, when considering the stock. In order to fully understand whether FVI is a good investment for you, we also need to consider important company-specific fundamentals such as Fortuna Silver Mines’s financial health and performance track record. I highly recommend you dive deeper by considering the following:

  1. Future Outlook: What are well-informed industry analysts predicting for FVI’s future growth? Take a look at our free research report of analyst consensus for FVI’s outlook.
  2. Past Track Record: Has FVI 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 FVI's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how FVI measures up against other companies on valuation. You could start with this free list of prospective options.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.