The Rankings
Methodology
e keep our methodology as
consistent as possible from
year to year so that it is possible
to create a time series of data, or
to just compare one year’s
winner to another. Even with
this in mind, though, it is
important to update the
methodologies and improve
them over time. We constantly
examine our financial ratios in
order to better measure companies’ performance. The measures
developed for the 2004 Rankings remain unchanged and are
likely to remain so, giving us
now six years of completely
consistent comparison.
W
calculating and considering,
but also one that should be
separated from overall financial
performance.
For our rankings methodology,
we have chosen six performance ratios, namely Total
Return to Shareholders (TRS),
ROE, ROA, Profit Margin,
Price to Book and Asset
Turnover. To evaluate financial
As a review, we define financial
performance as companies’
ability to improve operating
efficiency and to create shareholder value. Based on this
understanding, we distinguish
between performance ratios
and financial strength ratios.
The performance ratios focus
on evaluating the operating efficiency and the ability to create
value; while the financial
strength ratios emphasize
companies’ financial safety and
health. While we do not believe
that financial strength necessarily has direct impact on or is
a direct indicator of companies’
performance levels, it provides a
good benchmark from a creditor’s standpoint and ensures
the sustainability of company
operations, and we therefore
believe it is a metric very worth
www.marinemoney.com
strength, we look at Current
Ratio, Debt to Capitalization,
and Interest Coverage Ratio.
From a valuation point of view,
we leave the EV/EBITDA ratio
as a straightforward, standalone
benchmark.
This year again, we have ranked
and present performance and
financial strength separately. In
each of these divisions, we rank
each company’s performance
for each indicator and then
compute average rank scores
based on the unweighted
average of those indicator
ranks. The overall rank is determined according to the average
rank scores, with smaller being
better, a rank of one, of course,
being the best.
Equations for the financial
PERFORMANCE
Total Return to Shareholders
=
Change in share price + Dividend
–––––––––––––––––––––––––––––
Share price at beginning of period
Asset Turnover
=
Sales
–––––––––––––––––––––––––––––
Total assets
Profit Margin
=
EBITDA
–––––––––––––––––––––––––––––
Sales
ROE
=
Net income
–––––––––––––––––––––––––––––
Average shareholders' equity
ROA
=
EBIT
–––––––––––––––––––––––––––––
Average total assets
P/B
=
Market value of equity
–––––––––––––––––––––––––––––
Book value of equity
FINANCIAL STRENGTH
Current ratio
=
Current assets
–––––––––––––––––––––––––––––
Current liabilities
Debt to capitalization
=
Total debt
–––––––––––––––––––––––––––––
Debt + Equity
Interest (Debt) coverage ratio
=
EBIT
–––––––––––––––––––––––––––––
Interest payments
VALUATION
EV/EBITDA
=
Enterprise value
–––––––––––––––––––––––––––––
EBITDA
Marine Money
J
u
n
e
/
j
u
l
y
2
0
1
5
39
ratios we use for Marine Money
Rankings are listed in Figure 1,
and in the following paragraphs
we provide detailed descriptions of each metric, as well as
justifications for inclusion.
Performance
Ratios
Total Returns to
Shareholders (TRS):
There are some who would
argue that TRS is all that
matters for public companies.
TRS measures investors’ total
returns, amounting to gains
from stock appreciation and
dividend income, during the
holding period. In Marine
Money’s ranking system, we
measure TRS for the period of
the complete fiscal year. Not all
companies, however, report on
a calendar year, but are
included with the appropriate
fiscal year end. TRS essentially
measures how companies’
actual performance beat market
expectations, based on the
belief that capital markets have
efficiently factored in companies’ future performance and
created value at the associated
risk levels. In our rankings, the
higher the TRS, the better the
rank.
2
0
1
5
On the other hand, TRS
demonstrates a high performance level relative to market
expectations rather than an
absolute high performance
level. For example, a fair
performance in a laggard
company will result in a good
jump of stock price. But in such
a scenario, this would not mean
the company is performing well
according to an absolute standard – the reason that we do
40
Marine Money
J
u
n
e
/
j
u
l
y
not consider TRS a sufficient
metric to measure public
company performance. This
year we have fine-tuned the
calculation by using the local
currency for share prices and
dividends, thereby eliminating
dollar exchange rate aberrations.
Price to Book Ratio
Price to book ratio naturally
makes up the deficiency of TRS
by measuring an absolute level
of performance. We believe the
P/B ratio demonstrates how
efficiently companies utilize
invested equity capital to create
value. A higher P/B ratio in the
same industry reflects a market
view of better future performance with the same amount of
equity invested, because better
performance will lead to greater
discounted cash flows and
better current valuation. Note
that the P/B ratio is often used
as a valuation multiple, and a
P/B value below the industry
average may mean the company
is undervalued. In our ranking
method, higher P/B ratios lead
to a better performance ranking
– but of course it is very important to remember that it all
depends at what value ships are
put in the book.
Return on Equity
ROE is an all-time favorite to
provide a shortcut performance
evaluation metric for equity
investors. Return on equity tells
us the percent returned for each
dollar (or other monetary unit)
invested by shareholders. It not
only directly measures the earnings returned to equity holders,
but also factors in multiple
performance metrics like
leverage, profit margin and
asset turnover.
Return on Assets
In our 2004 Rankings, we
changed our definition of the
return part of ROA from net
income to EBIT. That decision
stands today. The rationale
behind this adjustment was that
EBIT provides a more consistent comparison between the
returns and the asset inputs. For
ROA, we want to evaluate how
efficient the firm is based on its
ability to create value using
total assets, consisting approximately of debt and equity. If we
calculate ROA using net
income, we would neglect the
difference brought about by
different levels of leverage.
When two firms show the same
level of net income over assets, a
highly levered firm creates more
EBIT with the same total assets
than a low-levered firm. In
other words, to compare apples
to apples, we use EBIT over
average total assets in calculating ROA.
Although subject to much
debate, we have chosen to treat
the impact of asset sales as a
below the line item ensuring
comparable comparisons based
upon earnings from operations
rather than distortions created
by more active asset traders.
This treatment is consistent
with an on-going concern
rather than that of a trader.
Profit Margin
Regarding profit margin, we
use EBITDA over sales instead
of net income over sales,
because we believe EBITDA is
a less manipulated metric that
better reflects a company’s
performance outcomes. Net
income is easier to manipulate
or distort by using different
accounting and taxation policies. For example, different
depreciation policies lead to
different final net incomes,
even when the same EBITDA is
created. It comes back again to
our original intention, to
provide a more correct benchmark to measure maritime
companies’ performance: how
efficient a company utilizes
resources to maximize shareholders’ value.
Asset Turnover Ratio
Finally, we utilize the Asset
Turnover Ratio as a direct
measurement of the firm’s efficiency in using assets. It is not
as complex as other ratios, but
as a representative of other
turnover ratios, it is still valuable in the evaluation of
performance. Asset turnover
measures the percent of sales a
company is able to generate
from its assets. It reflects the
level of capital a company has
tied-up in assets and how much
in the way of sales that
company can generate from
total assets. A high asset
turnover rate implies that
companies can generate strong
sales from a relatively low level
of capital. Low turnover would
imply very capital-intensive
operations.
Financial
Strength
Ratios
To measure companies’ financial strength, we focus on their
financial structures and ability
to fulfill liabilities. We use
www.marinemoney.com
Incident Response • Media Training • Drills • Reputation Building • Litigation Support
PROTECTING REPUTATION
The leading global communications
network for the shipping industry
MTI Network is the world’s leading media response and public
information service dedicated to the shipping industry. Today
some 6,000 vessels including gas carriers - tankers – bulkers –
reefers – roros - offshore rigs and support vessels and passenger
ships are directly registered with the MTI Network, offering 24/7
global reputation protection services. The Network provides a
range of media training courses and drills in support of OCIMF’s
TMSA initiative and works closely with leading P+I Clubs,
Maritime Law Firms, Class Societies and Maritime Organisations.
J
u
n
e
/
j
u
l
y
MTI Network Web Site Address:
http://www.mtinetwork.com
MTI UK • MTI USA • MTI Benelux • MTI Italy • MTI Spain •
MTI Greece • MTI Scandinavia • MTI South Africa • MTI Brazil •
MTI Canada • MTI Hong Kong • MTI Singapore • MTI Japan •
MTI Australia • MTI India • MTI Middle East • MTI Turkey
2
0
1
5
42
Current Ratio, Debt to Capitalization Ratio, and Debt
Coverage Ratio to evaluate
companies’ financial strength.
Current Ratio
A low current ratio would
reflect possible insolvency problems, as companies need
enough liquid assets to meet
short-term liabilities. While we
recognize that a very high
current ratio might imply that
companies are not investing
idle assets productively, we
focus on the financial health of
firms and would consider a
higher current ratio to mean a
stronger financial position.
Debt to
Capitalization Ratio
Leverage is a double-edged
sword. On the one hand, higher
gearing incurs more fixed
interest
obligations
and
increased financial risk, while
on the other hand, the use of
debt can help improve earnings
in a rising market and companies can benefit from a debt tax
shield where they do not pay
taxes for interest payments.
Generally, companies seek
balance in the use of debt and
equity to maximize their riskadjusted profits. Considering
the low level of taxation typical
among shipping companies,
however, and from the point of
view of financial safety, a lower
debt to capitalization ratio
offers less risky operations and
therefore increases a company’s
standing with regard to our
financial strength metric.
Interest Coverage Ratio
The Debt, or Interest Coverage,
Ratio represents the margin of
safety in making interest
payments. Debt holders require
a high coverage ratio to ensure
capability to repay from operations. A higher coverage ratio
implies that a company can
create enough cash to repay its
debt liabilities.
Valuation
EV to EBITDA
We don’t aim to provide a
comprehensive
valuation
analysis with this issue, but
EV/EBITDA provides a good
snapshot of a company’s valuation multiple relative to the
industry average. EV/EBITDA
measures the multiple of a
company’s market value over
the cash flows the company
creates; EBITDA is essentially
shorthand for free cash flow. A
relatively low ratio may indicate
that the firm is undervalued,
and it generally means that
earnings are relatively high with
regards to the value of the
company. Generally, a company
with
a
relatively
low
EV/EBITDA multiple would
be a good buy, so long as
EBITDA is stable.
There you have it. Now you
have everything you need to
analyze the data incorporated
herein. We hope you find both
the rankings and the company
snapshots that follow useful and
interesting.
Incident Response • Media Training • Drills • Reputation Building • Litigation Support
Marine Money
www.marinemoney.com