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If you are looking to invest in Noront Resources Ltd’s (TSXV:NOT), 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. There are two types of risks that affect the market value of a listed company such as NOT. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as NOT, because it is rare that an entire industry collapses at once. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.

Not all stocks are expose to the same level of market risk. The most widely used metric to quantify a stock's market risk is beta, 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.

View our latest analysis for Noront Resources

What does NOT's beta value mean?

Noront Resources’s five-year beta of 1.67 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, NOT 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.

Does NOT's size and industry impact the expected beta?

NOT, with its market capitalisation of CAD $107.42M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the materials industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the X industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of NOT’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Is NOT's cost structure indicative of a high 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 test NOT’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, NOT appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of NOT indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, NOT’s beta value conveys the same message.

What this means for you:

Are you a shareholder? You may reap the gains of NOT'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.