VintonCounty

Bullish on Commodities? Consider DryShips

DRYS has assets/equity ratio of 2.29. That amount of liabilities is not big; but it might worry investors, because shipping is cyclical. What if day rates were a fifth of present value, as in 2006? Would DRYS be able to make loan payments? Worse, ship values would fall; and lenders would probably demand more collateral. Normally I would say that lenders have incentive to consider such circumstances, so it must be safe. But we have seen recently that lenders sometimes fall under a spell and enter loan contracts they later regret.

I compared Dryships (DRYS) with Diana Shipping (DSX). I found a data reliability problem for return on assets (ROA). For DRYS, Morningstar says 27%; Yahoo Financial says 13.7%; and I calculated 474.6/2346.9=20.2% from the 20-F form. That affects return on equity (ROE), because ROE=2.29 x ROA. For DSX, Morningstar says 18.45%; Yahoo says 9.99%; and the 2007 annual report gives 134.2/944.3=14.2%.

Another thing that might make investors nervous is that DRYS retains most of its earnings for buying more ships. In a normal business, investors could be fairly confident that the retained earnings would build equity. But if a ship glut developed, ship values would fall; and it might be a long time before the retained earnings add their weights to the equity line. It's a wild business, suitable only for the bold.

On a happy note, I am amazed that no one comments on the most beautiful feature of international shipping: shippers pay no income tax.