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“No shipping company went bankrupt because it was unprofitable,” said Citi global head of shipping Michael Parker in Lori Ann LaRocco’s Dynasties of the Sea. They go bankrupt when they “run out of cash”.

Profits and losses are accounting terms that incorporate amorphous intangibles, non-cash items that are open to interpretation, and estimated timing of payables and receivables. Financial history is rife with creatively massaged quarterly accounting of profit and loss. But there’s no way to massage away the true ‘acid test’: cash.

“In shipping, cash is king,” Goldin Maritime head Randee Day told Fairplay last year, asserting that “there has been way too little focus on cash flow” and “the ability of shipping assets to generate cash flow”. Seward & Kissel partner Gary Wolfe, a top attorney in the US shipping securities business, highlighted cash in an interview with Fairplay this month. “It’s a very easy industry [to value],” he said. “It’s money in, money out. Cash in, cash out.”

For most shipping sectors, 2017 is shaping up to be a transitional year, a relative calm after a series of storms. To gauge where Dry Bulk could be headed next, Fairplay analysed the most basic questions that any business faces: How much cash do you have? How much are you making? How much do you need to pay your bills?

Because shipping is largely commoditised and most players generally earn similar rates and pay similar costs, and because there are detailed quarterly reporting requirements in the US public markets, the Fairplay analysis used US-listed companies as a global proxy.

Three measures were examined, using quarterly data compiled by online financial data platform Ycharts: cash and equivalents, net cash from operations, and the current ratio. Trends were measured over nine quarters, from the first quarter of 2015 (1Q15) through 1Q17 (2Q17 numbers were also analysed for those companies that had reported them).

A temporary drop in cash is not necessarily negative. It could simply indicate that a company is deploying previously raised cash to buy attractively priced ships that will earn high returns in the future. However, if total cash is clearly declining over an extended period and cash from operations is simultaneously falling, it is likely a negative indicator – and vice versa if the numbers are positive.

The current ratio, which is a rough ‘back of the envelope’ barometer, is calculated by dividing the current assets – cash, accounts receivable and liquid assets – by the current liabilities, i.e., debts and other obligations due within one year. A ratio of 2.0 or higher is generally considered healthy, while a ratio of under 1.0 is a possible cause for concern, implying that a company may need to raise more debt or sell more equity to meet its near-term obligations.

In shipping, the need to maintain a high current ratio differs by sector and business model. An LNG carrier owner does not need (and should not have) a high current ratio if it has a fleet on long-term charter, prodigious bank debt capacity, a policy of paying out dividends to investors, and a proven ability to tap capital markets. In contrast, a dry bulk owner that is entirely exposed to the spot market, has a low stock valuation, and is operating under a temporarily renegotiated debt agreement with its bankers should have a high current ratio.

In general, the Fairplay cash analysis found that shipowners are in a relatively stable position as of mid-2017.

Dry bulk owners experienced historically low freight markets in early 2016 and suffered huge cash outflows due to below-breakeven rates. Despite this, the sector does not appear to be facing a severe cash crunch in 2017.

The Fairplay analysis examined the cash positions and cash flows of eight US-listed companies: Diana Shipping, Eagle Bulk, Genco, Golden Ocean, Navios Holdings, Safe Bulkers, Scorpio Bulkers, and Star Bulk. In aggregate, these companies suffered a quarterly cash outflow of USD202.9 million in 1Q16, at the peak of the rate collapse. Rates have recovered since then, and some positive cash flows have resumed in 4Q16 and the first half of this year.

Overall, the cash levels of these dry bulk companies are surprisingly resilient this year given how bad the freight market was in 2016. The aggregate cash of these eight companies in 1Q17 was almost back up to levels seen in 3Q15. The dry bulk companies that have announced 2Q17 results – Scorpio Bulkers, Diana, and Safe Bulkers – posted further improvements in cash levels and cash from operations. Safe Bulkers booked US26.6 million in cash from operations during the first half of this year, compared to a cash outflow from operations of USD1 million during the same period last year.

Dry bulk companies survived last year’s slump by renegotiating bank agreements (reducing near-term debt amortisation payments) and raising cash by selling ships and equity. The surveyed bulker owners’ current ratio at the end of 1Q17 averaged around 4.5 (i.e., current assets were 4.5 times higher than current liabilities), confirming that there is ‘breathing room’ and no imminent bankruptcy threat.

The debate now is whether it is time to call the ‘all clear’, or whether it is too soon. Scorpio Bulkers has resumed previously deferred amortisation payments, and in return, lenders have removed restrictions on dividend pay-outs.

According to Scorpio Bulkers president Robert Bugbee, the normalisation of the lending agreement signals that “management believes we are through the worst”. But Deutsche Bank analyst Amit Mehrotra called the decision “a head scratcher” and pointed out that “current rates are still not high enough to generate much in the way of surplus operating cash flow”.

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