ASX:NME Income Statement Sep 21st 17
Does NME's size and industry impact the expected beta?
NME, with its market capitalisation of AUD $610.87K, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, NME’s industry, materials, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the materials industry, relative to those more well-established firms in a more defensive industry. This is consistent with NME’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can NME'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 NME’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, NME doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect NME 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. This outcome contradicts NME’s current beta value which indicates an above-average volatility.
What this means for you:
Are you a shareholder? You may reap the gains of NME's returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into NME.
Are you a potential investor? Before you buy NME, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. NME may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health.
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 Nex Metals Explorations 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 Nex Metals Explorations anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned.