Is DryShips Inc. (DRYS) Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let’s take a look at what DryShips Inc. (NASDAQ:DRYS)‘s  recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you’re about to see tell DryShips’ story, and we’ll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company’s become more efficient over time. Since profits may not always reported at a steady rate, we’ll also look at how much DryShips Inc. (NASDAQ:DRYS)’s free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If DryShips Inc. (NASDAQ:DRYS)’s share price has kept pace with its earnings growth, that’s another good sign that its stock can move higher.

Is DryShips managing its resources well? A company’s return on equity should be improving, and its debt-to-equity ratio declining, if it’s to earn our approval.

By the numbers
Now, let’s take a look at DryShips’ key statistics:

DRYS Total Return Price data by YCharts.

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	49.2%	Pass
Improving profit margin	(205.5%)	Fail
Free cash flow growth > Net income growth	(35%) vs. 88.1%	Fail
Improving EPS	(98.7%)	Fail
Stock growth (+ 15%) < EPS growth	(70.9%) vs. 98.7%	Pass

Source: YCharts. * Period begins at end of Q3 2009.

DRYS Return on Equity data by YCharts.

Passing Criteria	3-Year* Change	Grade
Improving return on equity	93.8%	Pass
Declining debt to equity	20.3%	Fail

Source: YCharts. * Period begins at end of Q3 2009.

How we got here and where we’re going
It has not been a particularly good three years for DryShips. It earns three passing grades largely on a technicality — the third quarter of 2009 was the last during a period of atrocious recessionary losses for the dry bulk shipper. It remains to be seen whether this will hold true next year, as net income has been in gradual decline since 2010.

DryShips is just one of many shippers in dire straits, as its recent drop comes in sync with Genco Shipping & Trading Limited (NYSE:GNK)‘s poor earnings report, after appearing so desperate to unload incomplete tankers that it paid over $20 million to its “buyer” to get the two ships taken off its hands. Bookending those two unpleasant reports are indications that DryShips is getting somewhat squeezed for cash, as it upped the number of shares it will sell of Ocean Rig UDW Inc (NASDAQ:ORIG). DryShips has held a majority interest in that company since it was first spun off, but it’s looking like the offshore driller would be better off on its own.