uploads///Financial leverage

Analyzing Financial Leverage for Dry Bulk Companies


Sep. 17 2015, Updated 8:47 a.m. ET

Leverage ratios

Investors in the shipping industry need to know a company’s debt levels. It’s such a capital-intensive industry that high levels of debt can put a strain on a company’s credit ratings. High debt levels can also weaken a company’s ability to purchase new equipment or finance other capital projects.

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Diana Shipping has low financial leverage

As the above chart shows, Diana Shipping (DSX) has the lowest financial leverage with debt to assets of 33.2% as of June 30, 2015. Companies with the strongest balance sheet can weather the weakness for a longer time than their highly leveraged peers.

Navios Maritime Partners (NMM) has debt-to-equity and debt-to-assets ratios of 76.4 and 41.8, respectively. These are lower than industry averages of 82.1 and 42.3, respectively. During NMM’s latest earnings call, management was asked a question about the company’s suboptimal leverage structure. Management commented that it’s recovering at a strong pace and will thus be adjusting its debt ratios.

It’s important to note that the earnings call was held on July 30, and the dry bulk market grew at its strongest clip in July 2015.

DryShips has high leverage

In the dry bulk shipping space (SEA), Navios Maritime Holdings (NM) and DryShips (DRYS) have the highest leverage ratios. Safe Bulkers (SB) is slightly more leveraged than NMM. DRYS’s high leverage has made its stock quite sensitive to short-term changes in shipping rates. It even had to sell some tankers to repay a loan.

Navios Maritime Holdings (NM) has 2% holdings in SEA. The SPDR S&P 500 ETF (SPY) represents the broader transportation industry.

It’s a common misconception that greater leverage generates higher returns. In an industry downturn, companies with higher leverage usually underperform. If the dry bulk shipping industry does recover, companies with higher leverage ratios can generally outperform those with a lower leverage.

In the next article, we’ll look more deeply into dry bulk companies’ cash holdings and their near and long-term needs to see if they can survive the current downturn.


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