For Vela Minerals Ltd’s (TSXV:VLA) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures VLA’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, 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.

View our latest analysis for Vela Minerals

What does VLA's beta value mean?

Vela Minerals has a beta of 2.76, 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, VLA 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.

How does VLA's size and industry impact its risk?

VLA, with its market capitalisation of CAD $475.86K, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, VLA also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. 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 VLA’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

How VLA's assets could affect its 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 VLA’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%, VLA appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect VLA 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. This is consistent with is current beta value which also indicates high volatility.

What this means for you:

Are you a shareholder? You may reap the gains of VLA'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.

Are you a potential investor? I recommend that you look into VLA'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. VLA may be a great investment during times of economic growth.

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 Vela Minerals 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 Vela Minerals 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.