AIM:AXM Income Statement Sep 18th 17
Does AXM's size and industry impact the expected beta?
With a market cap of GBP £1.90M, AXM falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, AXM also operates in the materials industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of AXM’s beta value discussed above.
How AXM'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 AXM’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, AXM doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect AXM to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what AXM’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could reap the gains of AXM's returns in times of an economic boom. However, during a downturn, a more defensive stock can cushion the impact of this risk. Depending on the composition of your portfolio, high-beta stocks such as AXM is valuable to pump up your returns, in particular, during times of economic growth.
Are you a potential investor? Before you buy AXM, you should look into its fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. AXM may be a great investment during times of economic growth.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Alexander Mining for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Alexander Mining anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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.