Many dry shipping companies and experts are forecasting significantly higher shipping rates in 2014 and beyond. Now would be a great time to prepare in advance. Double rates affect the valuations of companies such as Genco Shipping & Trading (GNK 0.05%), Baltic Trading Limited (NYSE: BALT), and Paragon Shipping much more dramatically than you'd think.

Why third quarter and double rates
For the easiest, quickest way to estimate what double rates would mean for a dry shipper, base your calculations on the most recent third quarter. Trying to predict what higher rates might mean for future performance brings in too many variables to yield a clear picture. Using solid numbers from the past will at least give your calcuations a firmer foundation.

Also, while you can calculate what the impact would have been for any percentage increase in rates, shipping rates for 2010 were more than double the current rates for the majority of 2010.  It's not hard to imagine a return to rate levels equal to that of a mere three years ago, especially given the industrywide optimism about the upcoming rate environment.

Genco Shipping & Trading
Genco reported its third-quarter results on Nov. 6. Shipping revenue was $58.6 million. Operating expenses were $72.8 million. Interest expense was $23 million. All of this led to a net loss of $35 million.

Since virtually all of Genco Shipping & Trading's fleet operates based on the daily spot rates, if those rates had doubled, shipping revenue would have nearly followed suit. All things being equal, this would have meant an extra $58.6 million in revenue, all falling straight to the bottom line, and it would have reversed a net loss of $35 million to net income to $23.6 million.

On an annualized basis, that would put Genco's P/E multiple under 2. Based on P/E alone, that is very cheap -- as long as you remember that Genco Shipping also has debt payment concerns coming due early next year.

Baltic Trading Limited
Baltic also reported its third-quarter results on Nov. 6. Similar to Genco Shipping & Trading, Baltic Trading Limited's fleet operates based on the daily spot market. Revenue was $9.1 million, against total operating expenses of $10.2 million and interest expenses of $1.1 million, all of which led to a net loss of $2.2 million.

If rates had been twice as high, revenue would have been $18.2 million, and net income would have been $6.9 million.  That comes out to a P/E multiple of around 6. While not as cheap as Genco Shipping & Trading on a P/E basis alone, Baltic Trading Limited is in better financial shape to begin with.

Paragon Shipping,
Paragon reported its third-quarter results on Nov. 7. Net revenue was $13.4 million. Total adjusted operating expenses were $7.8 million. Adjusted net loss was $0.4 million.

If rates had been twice as high -- and again, all other things being equal -- Paragon would have added $13.4 million to its bottom line. This comes out to $13 million in net income. On an annualized basis, the P/E multiple is slightly over 1. On the basis of P/E multiple only, Paragon Shipping would have been the cheapest of the 3.

Final Foolish thoughts
While I am in no way predicting that rates will double, it is a possibility. As an investor, it's wise to prepare for all possibilities, both positive and negative. As this exercise shows, at least for these dry shippers, doubled rates would make these companies' stock prices appear undervalued. Follow the spot rates for all ship sizes -- especially how they've changed relative to any previous quarter. By doing a rough calculation of how a change in rates would have affected an individual company, you can get an early lead on its results ahead of the official report.