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The size of Royal Caribbean Cruises Ltd. (NYSE:RCL), a US$25b large-cap, often attracts investors seeking a reliable investment in the stock market. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, its financial health remains the key to continued success. Today we will look at Royal Caribbean Cruises’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into RCL here.
Does RCL Produce Much Cash Relative To Its Debt?
RCL has built up its total debt levels in the last twelve months, from US$8.9b to US$11b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$248m to keep the business going. Additionally, RCL has produced US$3.6b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 33%, signalling that RCL’s operating cash is sufficient to cover its debt.
Can RCL meet its short-term obligations with the cash in hand?
At the current liabilities level of US$8.1b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.16x. The current ratio is the number you get when you divide current assets by current liabilities.
Is RCL’s debt level acceptable?
With debt reaching 87% of equity, RCL may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if RCL’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In RCL's case, the ratio of 6.14x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like RCL are considered a risk-averse investment.
Although RCL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven't considered other factors such as how RCL has been performing in the past. I recommend you continue to research Royal Caribbean Cruises to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RCL’s future growth? Take a look at our free research report of analyst consensus for RCL’s outlook.
- Valuation: What is RCL 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 RCL is currently mispriced by the market.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.