Does Carnival plc's (NYSE:CUK) Debt Level Pose A Problem?

The size of Carnival plc (NYSE:CUK), a US$45.75B large-cap, often attracts investors seeking a reliable investment in the stock market. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to extending previous success is in the health of the company’s financials. Today we will look at Carnival’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CUK here. See our latest analysis for Carnival

How does CUK’s operating cash flow stack up against its debt?

CUK has sustained its debt level by about US$9.22B over the last 12 months made up of current and long term debt. At this constant level of debt, CUK currently has US$395.00M remaining in cash and short-term investments , ready to deploy into the business. Moreover, CUK has generated US$5.32B in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 57.71%, meaning that CUK’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CUK’s case, it is able to generate 0.58x cash from its debt capital.

Can CUK meet its short-term obligations with the cash in hand?

With current liabilities at US$8.80B, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.18x, which is below the prudent industry ratio of 3x.

Is CUK’s debt level acceptable?

CUK’s level of debt is appropriate relative to its total equity, at 39.30%. This range is considered safe as CUK is not taking on too much debt obligation, which may be constraining for future growth. We can test if CUK’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CUK's case, the ratio of 17.71x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CUK and other large-cap investments thought to be safe.

Next Steps:

CUK’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Though its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I'm sure CUK has company-specific issues impacting its capital structure decisions. I suggest you continue to research Carnival to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for CUK’s future growth? Take a look at our free research report of analyst consensus for CUK’s outlook.
2. Valuation: What is CUK worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CUK is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.