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Investors Should Look at Liquidity Profile of Dry Bulk Companies

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Sep. 17 2015, Updated 8:48 a.m. ET

Net debt to forward EBITDA

Having a high debt is not always bad if a company has the capacity to pay it back with its earnings. The net-debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio tells how many years it will take for the company to repay its debt if net debt and EBITDA stay constant. Net debt is calculated as total debt minus cash and cash equivalents.

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Capacity to repay debt obligations

Net debt to forward EBITDA for Diana Shipping (DSX) is quite high at 14.7x. Ratios for Navios Holdings (NM), Safe Bulkers (SB), and Navios Maritime Partners (NMM) are 14.4x, 7.1x, and 3.4x, respectively.

Liquidity position

As we saw in our previous article, financial leverage is important to gauge the long-term solvency of a company. In addition, investors should take note of the short-term liquidity profile for these companies. In a weaker shipping rates environment, short-term liquidity for a company might come under increasing pressure, forcing it to take drastic measures.

The current ratio is another way to estimate a company’s liquidity. The above graph shows the current ratio of dry bulk companies. Current ratio indicates the ability of a company to pay its short-term obligations using its short-term assets.

The higher the ratio, the better the company is able to service its short-term liabilities, and vice versa. Safe Bulkers and Diana Shipping are doing the best in this parameter.

The SPDR S&P 500 ETF (SPY) represents the broader transportation industry.

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