If you are a shareholder in Full Metal Minerals Ltd’s (TSXV:FMM), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
View our latest analysis for Full Metal Minerals
What does FMM’s beta value mean?
With a beta of 4.15, Full Metal Minerals is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, FMM 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.
Does FMM’s size and industry impact the expected beta?
A market capitalisation of CAD CA$622.75K puts FMM in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, FMM’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 FMM’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
TSXV:FMM Income Statement Jan 8th 18
Is FMM’s cost structure indicative of a high 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 examine FMM’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. FMM’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. Thus, we can expect FMM 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, FMM’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You could benefit from higher returns from FMM during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. However, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. For more company-specific research on FMM, check out our our free analysis plaform here.
Are you a potential investor? I recommend that you look into FMM’s fundamental factors such as its current valuation and financial health as well. 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. FMM may be a great investment during times of economic growth. You can examine these factors in our free fundamental research report for FMM 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.