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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Royal Caribbean Cruises Ltd. (NYSE:RCL) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Royal Caribbean Cruises

What Is Royal Caribbean Cruises's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Royal Caribbean Cruises had US$23.0b of debt, an increase on US$20.7b, over one year. However, because it has a cash reserve of US$1.94b, its net debt is less, at about US$21.1b.

How Strong Is Royal Caribbean Cruises' Balance Sheet?

The latest balance sheet data shows that Royal Caribbean Cruises had liabilities of US$8.57b due within a year, and liabilities of US$22.3b falling due after that. Offsetting this, it had US$1.94b in cash and US$531.1m in receivables that were due within 12 months. So its liabilities total US$28.4b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$15.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Royal Caribbean Cruises would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Royal Caribbean Cruises can strengthen its balance sheet over time. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 477%, to US$8.8b. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Even though Royal Caribbean Cruises managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$752m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$2.2b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Royal Caribbean Cruises , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.