One Thing To Consider Before Buying Coziron Resources Limited (ASX:CZR)
If you are a shareholder in Coziron Resources Limited’s (ASX:CZR), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures CZR’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 broad market index 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.
Check out our latest analysis for Coziron Resources
An interpretation of CZR’s beta
Coziron Resources’s five-year beta of 2.47 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. According to this value of beta, CZR 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.
Does CZR’s size and industry impact the expected beta?
A market capitalisation of AU$30.35M puts CZR in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, CZR’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 CZR’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can CZR’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 test CZR’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, CZR 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 CZR 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, CZR’s beta value conveys the same message.
What this means for you:
You could benefit from higher returns from CZR during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. Though, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. What I have not mentioned in my article here are important company-specific fundamentals such as Coziron 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 CZR’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 CZR 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 CZR’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.
