Capacity to repay
As the crude tanker industry is capital intensive, a huge amount of debt on a company’s balance sheet is common and shouldn’t worry investors. However, it’s important for investors to know whether a company has the capacity to repay its debt obligations.
The net debt-to-EBITDA[1. earnings before interest, tax, depreciation, and amortization] ratio indicates how many years it will take for a company to repay its debt if its net debt and EBITDA stay constant. Net debt is calculated as total debt minus cash and cash equivalents.
Tsakos Energy Navigation (TNP) has the highest net debt-to-EBITDA ratio of ~6.0x, followed by Frontline (FRO) and Teekay Tankers (TNK) who have ratios of 3.6x and 3.5x, respectively. This implies that it could take around three to four years for the company to repay its debt if its net debt and EBITDA remain at constant levels.
Nordic American Tankers (NAT) has consistently maintained very low financial risk. The company’s debt level was constant from 2012 to 2015, and then increased in 2015. The company has a net-debt-to-EBITDA ratio of 1.4x, which is one of the lowest ratios among its peers. Euronav (EURN) and DHT Holdings (DHT) have ratios of 2.7x and 2.1x, respectively.
A company’s current ratio is a way to estimate its liquidity. The 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 can service its short-term liabilities, and vice versa.
Along with having a comfortable solvency position, Nordic American Tankers also has a comfortable liquidity position with a current ratio of 5.9x, the highest among its peers. None of the companies have liquidity concerns, as all the crude (DBO) tanker companies have current assets that exceed their current liabilities.
DHT Holdings (DHT), Euronav, Tsakos, Frontline, and Teekay Tankers have current ratios of 1.7x, ~1.3x, ~1.0x, ~1.5x, and 0.84x, respectively.