Yahoo Finance Should You Be Holding Arc Minerals Ltd (LON:ARCM) Right Now?
If you are looking to invest in Arc Minerals Ltd’s (AIM:ARCM), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. ARCM is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
See our latest analysis for Arc Minerals
An interpretation of ARCM’s beta
Arc Minerals has a beta of 1.18, 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. Based on this beta value, ARCM 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 ARCM’s size and industry impact the expected beta?
ARCM, with its market capitalisation of UK£17.11M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the metals and mining industry, which has been found to have high sensitivity to market-wide shocks. 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 ARCM’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How ARCM’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 examine ARCM’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since ARCM’s fixed assets are only 1.42% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts ARCM’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of ARCM’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 ARCM. What I have not mentioned in my article here are important company-specific fundamentals such as Arc Minerals’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Financial Health: Is ARCM’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 ARCM 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 ARCM’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.
