One Thing To Consider Before Buying Niko Resources Ltd (TSE:NKO)
For Niko Resources Ltd’s (TSX:NKO) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures NKO’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 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 Niko Resources
An interpretation of NKO’s beta
Niko Resources has a beta of 8.63, 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, NKO will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could NKO’s size and industry cause it to be more volatile?
With a market cap of CA$7.99M, NKO falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, NKO also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil and gas industry, relative to those more well-established firms in a more defensive industry. This is consistent with NKO’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How NKO’s assets could affect its 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 NKO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. NKO’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of NKO indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, NKO’s beta value conveys the same message.
What this means for you:
You could benefit from higher returns from NKO 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. In order to fully understand whether NKO is a good investment for you, we also need to consider important company-specific fundamentals such as Niko Resources’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
1. Financial Health: Is NKO’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.
2. Past Track Record: Has NKO 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 NKO’s historicals for more clarity.
3. 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.
