If you are looking to invest in Atlatsa Resources Corporation’s (TSX:ATL), 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. The beta measures ATL’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the broad market index 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.

See our latest analysis for ATL

An interpretation of ATL's beta

Atlatsa Resources has a beta of 2.48, 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. According to this value of beta, ATL 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.

Could ATL's size and industry cause it to be more volatile?

A market capitalisation of CAD $19.25M puts ATL in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, ATL’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with ATL’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Is ATL'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 test ATL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. ATL'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 ATL 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, ATL’s beta value conveys the same message.

What this means for you:

Are you a shareholder? You could benefit from higher returns from ATL 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.

Are you a potential investor? Before you buy ATL, you should factor how your portfolio currently moves with the wider market, and where we are in the economic cycle. This stock could be an outperformer during times of growth, and it may be worth taking a deeper dive into the fundamentals to crystalize your thoughts on ATL.

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 Atlatsa Resources 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 Atlatsa Resources anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

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.