Volatility Reflects Higher Risk Investors -Myassignmenthelp.Com

Question: Discuss About The Volatility Reflects Higher Risk Investors? Answer: Introducation Kairos Minerals Limited is regarded as the Australian Nickel exploration organization. The portfolio of the Kairos Minerals consists of the three core entirely owned projects that is strategically situated in the nickel districts of Australia. The company maintains the long run strategy of constantly striving the process of exploration having counter-cyclical approach to the expansion (Kairos Minerals 2018). The company chiefly remains engrossed on the creation of shareholders value by conducting exploration activities with greater focus on the Western Australia. Ownership and governance structure of company: The ownership structure of Kairos Minerals comprises of the executive chairman, Non-Executive Directors and Company Secretary. Kairos Minerals is well organized with leading technical teams of the industry working under one unit. The governance structure of the company includes the team with greater than 140 years of exploration experience in mining with pivotal role in the areas of innovation, delineation and expansion of mineral resources. In identifying the need for the top most standard of corporate behavior and responsibility the directors of the Kairos Minerals support and promotes the highest practices of corporate governance. Calculation of performance ratios: The variable TA refers to Total Assets whereas the variable OE represents the Ordinary Equity. Both the variable is interconnected with the return on assets and return on equity. With a rise in the amount of total assets the value of the net income would remain same. This reflects that there would be a fall in return on assets since they are used appropriately for deriving income. Rise in the asset value and income being same would result in low amount of debt equity ratio. The lower debt ratio would result in higher amount of return on equity. Hence, the value of Return on equity and Return on Assets is ascertained through total amount of asset and equity. As evident from the above stated tabular representation it is observed that the ROE is higher than ROA throughout the four years. These models reflect the proficiency of firm in making an efficient use of resources in producing assets. The return on equity is lower than the return on assets since reported value of total ordinary equity is lower than the value of total assets. As a sign of healthy organization the value of total assets usually remains higher than the total equity since the amount of reportable assets is higher than the amount of equity when the liabilities of the firm have fell down. Two graphs with the description of results: As evident from the above stated graphical representation of the share price movement an assertion can be bought forward by stating that the Kairos Mineral have reported a highly volatile movement. On the other hand, the all order index reported a less volatile stock price movement. The evidences from the graph represents that the movement of stock price at certain circumstances have rose sharply. Opposite to the higher stock price reported by Kairos Minerals there have been instances where the company has reported a movement of sharp decline in their stock price with stock prices falling below the mark of all ordinary index (Au.finance.yahoo.com. 2018). Significant factors influencing the share price of Kairos Minerals: Having the market capitalization of approximately AUD A$59.77 million places the company in the category of small cap stock and tends to have higher amount of beta in comparison to the larger firms. Along with this one of the important factor that is responsible for creating an influence on the stock price is that the company operates in metals and mineral industry that have strongly reflected a strong reaction to the market wide shocks. The analysis has represented that the companys fixed assets to the total assets ratio is higher which represents that the firm makes the use of large chunk of capital on the assets. As a result of this the company has reflected higher amount of beta than the firms of identical size with the lower proportion of fixed assets on the balance sheet. This factor is consistent with the present value of beta that represents higher volatility on the stock price. The calculated beta for the Kairos Minerals Ltd represents 0.33. Calculation of Beta values and expected rate of returns: The rationale for the conservative investment on KAI includes that the require rate of return for the company is 5.98 inclusive of the market risk premium of 6%. Whereas the risk free rate for investment in Australian bond is 4%. With the prevalence of significantly less amount of difference in the required rate of return an investor should moderately make an investment in the shares of Kairos Ltd. However, with the less amount of beta value reported the investment prospect for the investors is less risky since the stock is less prone to fluctuation with the market index. Weighted average cost of capital: The higher amount of weighted average cost of capital or WACC is significantly the representation of higher amount of risk that is related with the operations of the firm. Investors generally need additional amount of return to assess the additional risk. An organizations WACC could be used as the estimation of the anticipated costs for overall financing of their resources. This comprises of the payments that is made on the debt commitments or the cost associated with the debt financing and the rate of return that is demanded through financing of cost of equity. Debt ratios for the past two years: As evident from the debt ratio of the firm an important assertion can be bought forward by stating that Kairos Minerals has undertaken significant number of initiatives in reducing their debt obligations. The tabular representation states the debt obligation has been falling since the debt ratio stood 52.72% which subsequently fell down to 36.19%. therefore, it can be stated that the company has undertaken a positive initiative in reducing their debt. During the year 2017 in the month of June the company has issued 47,619 of fully paid ordinary shares at $0.021 each share to the sophisticated and institutional investors. Considering the gearing of Kairos Minerals an assertion can be bought forward by stating that a large part of the capital for the company comprises of the share capital. Dividend policy: The directors of Kairos Minerals have not reported any dividend during the financial year. I would like to draw your kind attention towards my recommendations that it would not be wise to invest in Kairos Minerals Ltd since the company has not reported any payment of dividends to the shareholders. Additionally the Kairos Minerals five year beta stood 2.81 which represents that the value of the company would swing up more that the anticipated market when the market hit prosperous times. However, the company has reported a higher fall in terms of downturn. Such kind of volatility reflects higher risk for the investors and it would not be ideal for investors in making an investment in such fluctuating stock. I hope that the above stated recommendations have successfully been able to provide you with sufficient information regarding investment and it is advised that you make an wise investment decision. References list: Au.finance.yahoo.com. (2018). ^AORD Historical prices | ALL ORDINARIES Stock - Yahoo Finance. [online] Available at: https://au.finance.yahoo.com/quote/%5EAORD/history?period1=1432751400period2=1501353000interval=1mofilter=historyfrequency=1mo [Accessed 23 Jan. 2018]. Kairos Minerals. (2018).Company Profile - Kairos Minerals. [online] Available at: https://www.kairosminerals.com.au/company-profile/ [Accessed 23 Jan. 2018].