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What Kind Of Risk Should You Expect For Vector Resources Limited (ASX:VEC)?
Joel Foster April 19, 2018
If you are a shareholder in Vector Resources Limited’s (
ASX:VEC), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as VEC. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not every stock is exposed to the same level of market risk. A widely-used metric to measure a stock’s market risk is beta, 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.
See our latest analysis for Vector Resources
What is VEC’s market risk?
Vector Resources’s five-year beta of 2.02 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, VEC may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
ASX:VEC Income Statement Apr 19th 18
Does VEC’s size and industry impact the expected beta?
VEC, with its market capitalisation of AU$33.29M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, VEC also operates in the metals and mining industry, which has commonly demonstrated strong reactions 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 supports our interpretation of VEC’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Can VEC’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine VEC’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. VEC’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 VEC indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, VEC’s beta value conveys the same message.
What this means for you:
You may reap the gains of VEC’s returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk. What I have not mentioned in my article here are important company-specific fundamentals such as Vector Resources’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is VEC’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 VEC 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 VEC’s historicalsfor 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.
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Joel Foster
Joel is a relatively new investor, only investing for the last 5 years. He believes though, that it’s not the amount of time in the market that determines a good investor, but rather how dedicated they are to actively improving their knowledge.
He has immersed himself in the world of investing, and prides himself on avoiding hype from latest trends and news.
Reach Joel by sending an email at
[email protected].
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