Asset revaluation and company rates of return in the shipping industry

Abstract

Shipping entities have in the past, on average, reported poor financial performance and yet have continued to retain and attract capital. This paper explores this apparent contradiction by investigating how alternative approaches to the question of asset revaluation affect financial performance calculations. Asset revaluation has traditionally been seen as reducing the value of assets in company accounts to reflect depreciation. However, economic theory suggests asset values are determined by expected future earnings, with fluctuations in expectations leading to increases or decreases in asset prices. In such circumstances, the use of the traditional accounting approach to calculate company rates of return will lead to errors. To illustrate this finding, data on the 120,000 dwt dry bulk carrier market is used to calculate company financial performance, defined as the 1 year rate of return, for a hypothetical single vessel shipping company on both the traditional accounting basis and the economic basis. The 2 approaches produce results that are both quantitatively different and uncorrelated, indicating that past use of the traditional method has resulted in an inaccurate, distorted picture of the financial performance of the shipping industry.