Qualifying Cashflows

By Matt McCleery

Of all the thousands, probably hundreds of thousands, of ship finance charts and graphs we’ve made over the years, we’ve never had as many comments as we have gotten about the one that appears alongside this article – vessel value to EBITDA.

We came up with this valuation metric because many of our investor friends on Wall Street were valuing public companies by enterprise value, or “EV,” to EBITDA, so we simply applied the same concept to the values, or “enterprise value” in Wall Street parlance, of every major class of bulk vessel.

Enterprise value, for those who don’t make their living uttering such words, is defined as the value of the debt and equity in a business – in this case, the value of a mortgage free ship. So what this table really shows is how many years, at prevailing charter rates, it will take an investor to get back his original investment in a ship, plus repay in full any debt that was assigned to the vessel if the investor were to buy the ship, collect the freights, pay the expenses and use the rest of the free cash, or EBITDA, to repay the capital employed in the project. While there is nothing particularly novel about this valuation metric in the world of, say, private equity, the use of this tool for individual ships has never been a standard valuation metric, largely because of rate volatility.

This is only an excerpt of Qualifying Cashflows

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