DryShips' Financials Don't Inspire Confidence

I like using The Wall Street Journal's condensed version of financial data. It provides enough detail to do some quick analysis that gets me started. This is back-of-the-envelope type of data. So let's look at DryShips: In 2003 it looks as if total revenue amounted to about $25 million. By 2007, total revenue surged to $582 million. So far, so good. Net income in 2003 was about $7.1 million, and by 2007, net income rose to $474 million. From this cursory look, the income statement looks fine. In fact, it actually looks outstanding.

Moving on to cash flow, in 2003, cash from operating activities amounted to $2.4 million. By 2007, cash from operating activities increased to $407 million. Now the trouble begins. It appears that this company is laying out cash for vessels that more than eclipses any cash it makes from operating activities. There is a line in the cash flow statement entitled "additional vessel costs" that amounted to $799 million. This more than eclipses "cash from operating activities," which came in at $407 million. It appears that the company made up the difference by borrowing.

Looking at the balance sheet, it appears that this is in fact the case, as long-term debt moved from $36 million to over $1 billion by 2007. This company is spending more than it is making and is using long-term debt to fill the hole.

From an investment standpoint, I have zero interest in this company. This is not to say that ultimately the company won't become self-funding, pay down its debt and become a spectacular long-term investment. It very well could. (I have rarely seen this actually happen.) Given the fact that there are over 6,000 companies to choose from, many of which are self-funding, there are many better financials to be looking at.

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At the time of publication, Horlbeck had no positions in stocks mentioned.

Todd Horlbeck is president and founder of Horlbeck Capital Management, which he founded in 2002. Horlbeck was previously an investment broker at AG Edwards & Sons for 11 years. He is a graduate of the University of Wisconsin-Madison and lives in St. Charles, Ill.