Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples
  • The consistency of past earnings and cash flow
  • How much growth we can expect

Let's see what those numbers can tell us about how cheap DryShips (Nasdaq: DRYS) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

DryShips has a P/E ratio of 24.6 and a negative EV/FCF ratio (i.e., it has negative free cash flow) over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, DryShips has a P/E ratio of 30.0 and a negative five-year EV/FCF ratio.

A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

DryShips is 0 for 4 on hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

DryShips

24.6

N/A

30.0

N/A

Eagle Bulk Shipping (Nasdaq: EGLE)

17.2

N/A

7.2

N/A

Excel Maritime Carriers (NYSE: EXM)

1.5

11.7

3.7

16.7

Diana Shipping (NYSE: DSX)

8.5

462.7

8.0

N/A

Source: Capital IQ, a division of Standard & Poor's.

Numerically, we've seen how cheap DryShips is on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, DryShips' net income margin has ranged from -95.5% to 84.5%. In that same time frame, unlevered free cash flow margin has ranged from -138.1% to 7.4%.

How do those figures compare with those of the company's peers? See for yourself:



Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.

Additionally, over the past five years, DryShips has tallied up four years of positive earnings and one year of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Five-year analyst growth estimates tend to be comically overstated. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, DryShips has put up past EPS growth rates of -50.6%. Meanwhile, Wall Street's analysts expect future growth rates of 1%.

Here's how DryShips compares it its peers for trailing five-year growth (note: Eagle Bulk Shipping doesn't have five years worth of data):



Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:



Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of DryShips are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 24.6 P/E ratio. Still, the numbers are just a start.

As you can see by the margin ranges, the dry bulk shipping industry can be quite volatile. As an investor, that's not necessarily a bad thing, but you'd better know the industry well. My colleague Chris Barker covers the area and highlighted some of the difficulties and prospects here.

If you find DryShips' numbers compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you.

If you want more stock ideas, check out our featured articles. Or sign up for our latest free report in the box below.

Anand Chokkavelu doesn't own shares in any company mentioned. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.