When it comes to dry shippers these days, cash is king and debt is a shackle. If only the debt load of many dry shippers were to magically vanish, the results might leave you stunned. Third-quarter results without the interest expense on its massive debt would have made a world of difference for DryShips (DRYS). 

Right around the time the housing market was red hot, so too, was the dry shipping industry. Credit was easy and many shippers thought the good times would never end. As such, many of them took on mountains of debt to expand their fleets. Now that shipping rates have fallen from the stratosphere, shippers are left dealing with an interest- and debt-payment hangover.

Calculating the debt and interest for shipping only
DryShips' financials are reported in combination with its majority-owned subsidiary, Ocean Rig UDW (ORIG). Since Ocean Rig UDW is a public company, it's easy to back out the debt and interest expense for the subsidiary, and calculate the results of the shipping business alone.

DryShips last reported around $5.2 billion in debt, with $141 million in interest, finance, and other related expenses. From this, subtract out the Ocean Rig UDW debt and finance-related numbers.

Ocean Rig UDW ended the quarter with total debt of around $3.56 billion. Interest, finance, and other related expenses were around $111 million.

$5.2 billion minus $3.56 billion leaves around $1.64 billion in debt for the shipping business alone. For the finance-related expenses, $141 million minus $111 million leaves around $30 million.

Shipping with interest
DryShips had almost $76.5 million in shipping revenue in the third quarter. Using the same method of backing out the Ocean Rig UDW operating expenses from the DryShips report, operating expenses were about $96.7 million for the shipping business. This means the shipping business alone had an operating loss of around $20.2 million.

$31.2 million of its operating expenses consisted of "depreciation and amortization." This is simply an accounting entry to spread the historical cost of large purchases over several years in the future, but it has no practical effect on cash flows.

If you back out the $31.2 million in depreciation and amortization, DryShips' shipping business would have had an $11 million gain. This means that on an operating basis, the shipping business in the third quarter was quite profitable.

Why this even matters
There are two important takeaways from this. First, if the shipping environment improves, especially in terms of rates, much of that increased revenue would fall straight to DryShips bottom line. That $11 million could go up quite quickly. For example, if DryShips' $76.5 million shipping revenue were to go up by just 15%, it could come out to $11.5 million in extra operating profit. This would be more than double the $11 million of the third quarter.

The second reason why this is important is because this is the view DryShips' lenders would most likely have regarding shippers when considering refinancing or lending. The lenders don't care how much DryShips originally paid for the ships (hence, they exclude depreciation), and they aren't going to include the finance-related expenses either. They only want to know whether the business will have enough leftover real-life cash income to service its debt payments. From there, they will potentially calculate an affordable and agreeable interest payment.

Foolish final thoughts
The finance-related expenses are quite a drag on DryShips' shipping results. $1.64 billion in shipping business debt will do that. As long as DryShips' lenders are willing to accept token payments on debt until the shipping environment improves, DryShips should have some leverage with its debtholders. Follow the shipping rate environment. For DryShips to keep its lenders docked, those rates must continue to improve dramatically.