How To Make Sense Of EBITDA In The Shipping Industry

Oct. 11, 2012 4:17 PM ETDSX, EGLE, SB, GNK8 Comments

EBITDA (Earnings before Interest, Taxes, Depreciation & Amortization) is a very popular, but also controversial measure of operating performance in the bulk shipping industry. It is popular because many investors base their investment decisions on EBITDA figures. In fact, most shipping companies report EBITDA in their earnings report. It is also controversial, because it is not recognized by US GAAP and lacks a universal definition. In this article I will look closely at EBITDA, its advantages and drawbacks, and how to properly use it when considering an investment in shipping. I will use as sample four publicly traded shipping companies, namely Diana Shipping Inc. (DSX), Eagle Bulk Shipping Inc. (EGLE), Genco Shipping & Trading Limited (GNK), and Safe Bulkers Inc. (SB).

EBITDA is a pro-forma accounting figure that measures the operating efficiency of a company, taking into consideration vessel operating expenses and administrative overhead. It also measures a company's capacity to service its debt obligations, and is frequently used in loan covenants. EBITDA is an indirect method of calculating a company's operating margin. In that regard, it is similar to the indirect method of calculating the operating cash flow.

One of the greatest advantages of EBITDA is that it is readily available, almost as ubiquitous as net income or earnings per share. Even when it is not reported (a notable exception in our sample is Diana Shipping Inc.), an investor/analyst could easily calculate it based on the company's income statement.

But that is when problems begin. As I mentioned above, EBITDA is not recognized by US GAAP & lacks a universal definition. One company's calculation methodology may be different than another's. To make matters worse, two companies in our sample (Eagle Bulk Shipping Inc. and Safe Bulkers Inc.) report a second set of adjusted EBITDA figures, with different adjustments each.

This article was written by

Lambros Papaeconomou is a business writer and owner of NYFEX Research, a strategic advisory firm specializing in shipping, logistics, and capital markets. He has over 25 years of work experience in the shipping industry.Prior to founding NYFEX Research, Lambros was the US Correspondent for Lloyd's List, focusing on news reporting, analysis and commentary on capital markets and publicly traded shipping companies.Lambros studied Naval Architecture & Marine Engineering at the National Technical University of Athens. He holds an MBA from the University of California at Berkeley, and he is certified as a CPA by the State of Illinois.

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