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Assessing Frontline’s Financial Health

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High leverage

Crude (DBO) tanker companies such as Frontline (FRO), Nordic American Tankers (NAT), Teekay Tankers (TNK), DHT Holdings (DHT), and Euronav (EURN) are highly leveraged. Leverage means the fixed obligations of a company. Investors should keep in mind that high leverage may not always be negative, as leverage is a double-edged sword. Leverage can magnify returns in a bull market and increase risk in a downturn.

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Debt profile

As of September 2015, Frontline (FRO) had on its record $156 million of total debt. Of this, only $4 million is in the form of short-term debt, and the remaining is long-term debt. The company doesn’t have any immediate debt repayment.

Merger effect

Frontline contracted two newbuilds in November. After the merger is completed, the combined company will have 22 newbuilds that are currently under construction with expected delivery dates of 2015–2017.

Frontline 2012 has obtained debt financing for six newbuilds. The combined company needs to finance the remaining 16 newbuild vessels to be delivered between the second half of 2016 and the end of 2017.

Frontline’s financial health

  • Frontline’s cash increased in the third quarter to $94 million from last quarter’s $78 million.
  • Frontline’s current ratio, which tells us the company’s liquidity position, stands at 1.36. A ratio higher than 1 signifies the company has sufficient liquid assets compared to its current liabilities and the company won’t face any liquidity crunch.
  • The company’s net-debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) stands at 9. This tells us the company will be able to pay off its debt in nine years, assuming net debt and EBITDA remain constant.
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