As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy Paragon Shipping
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Paragon Shipping meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Paragon's earnings and free cash flow history.
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Paragon has managed to remain profitable on a net-income basis over the past five years, though that's fluctuated somewhat. The massive free cash flow shortfalls were largely due to capital expenditures.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity Ratio |
Return on Equity (LTM) |
Return on Equity (5-Year Average) |
|---|---|---|---|
| Paragon Shipping |
62% |
4% |
9% |
|
Dryships |
72% |
6% |
11% |
|
Navios Maritime Partners |
65% |
17% |
27% |
|
Diana Shipping |
32% |
12% |
19% |
Source: Capital IQ, a division of Standard & Poor's.
Paragon has been generating somewhat lower returns on equity than its peers lately, while its debt has been in line with the industry.
3. Management
CEO Michael Bodouroglou has been at the job since he founded the company in 2006.
4. Business
Shipping isn't particularly susceptible to technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Paragon, we've learned that the company has tenured management, a moderate debt load, and a straightforward industry, though it doesn't particularly exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings power and high returns on equity.
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