Is Royal Caribbean Cruises (NYSE:RCL) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Royal Caribbean Cruises Ltd. (NYSE:RCL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Royal Caribbean Cruises

What Is Royal Caribbean Cruises's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Royal Caribbean Cruises had debt of US$20.7b, up from US$19.3b in one year. On the flip side, it has US$2.71b in cash leading to net debt of about US$18.0b.

A Look At Royal Caribbean Cruises' Liabilities

According to the last reported balance sheet, Royal Caribbean Cruises had liabilities of US$7.29b due within 12 months, and liabilities of US$19.9b due beyond 12 months. On the other hand, it had cash of US$2.71b and US$408.1m worth of receivables due within a year. So it has liabilities totalling US$24.1b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's massive market capitalization of US$21.3b, we think shareholders really should watch Royal Caribbean Cruises's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Royal Caribbean Cruises's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Royal Caribbean Cruises had a loss before interest and tax, and actually shrunk its revenue by 31%, to US$1.5b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Royal Caribbean Cruises's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$3.8b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$4.1b over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Royal Caribbean Cruises .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.