How Financially Strong Is Carnival plc (LON:CCL)?

Simply Wall St

Sun, Jun 30, 2019, 2:43 AM

There are a number of reasons that attract investors towards large-cap companies such as Carnival plc (LON:CCL), with a market cap of UK£24b. 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. However, the key to their continued success lies in its financial health. 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. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into CCL here.

Check out our latest analysis for Carnival

CCL’s Debt (And Cash Flows)

CCL has built up its total debt levels in the last twelve months, from US$9.9b to US$11b , which includes long-term debt. With this increase in debt, CCL currently has US$1.2b remaining in cash and short-term investments , ready to be used for running the business. Additionally, CCL has produced US$5.6b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 50%, meaning that CCL’s operating cash is sufficient to cover its debt.

Does CCL’s liquid assets cover its short-term commitments?

Looking at CCL’s US$10b in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.27x. The current ratio is calculated by dividing current assets by current liabilities.

Does CCL face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 46%, CCL can be considered as an above-average leveraged company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can check to see whether CCL is able to meet its debt obligations by looking at the net interest coverage ratio. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In CCL's case, the ratio of 17.66x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CCL and other large-cap investments thought to be safe.