Carnival Corp. & plc (NYSE:CCL)

The period under review demonstrates significant fluctuations in financial performance, particularly concerning profitability and its relationship to capital employed. Net operating profit after taxes (NOPAT) experienced a dramatic decline from 2018 to 2020, followed by a gradual recovery through 2023, though not reaching initial levels. The cost of capital decreased from 2018 to 2021, before increasing in the most recent year. Invested capital increased substantially from 2018 to 2020, then decreased over the subsequent three years. Consequently, economic profit remained negative throughout the entire period, although the magnitude of the loss diminished over time.

NOPAT Trend

NOPAT began at US$3,339 million in 2018 and decreased to US$3,226 million in 2019. A substantial decline occurred in 2020, resulting in a loss of US$9,312 million. While losses continued in 2021 and 2022 (US$7,863 million and US$4,485 million respectively), the magnitude lessened. A return to profitability was observed in 2023, with NOPAT reaching US$2,207 million, indicating a recovery but remaining below 2018 levels.

Cost of Capital Trend

The cost of capital exhibited a decreasing trend from 27.78% in 2018 to 15.13% in 2022. However, it increased to 17.91% in 2023. This suggests a changing risk profile or interest rate environment impacting the company’s funding costs.

Invested Capital Trend

Invested capital increased from US$35,074 million in 2018 to US$49,017 million in 2020. Following this peak, it decreased steadily to US$39,428 million in 2023. This reduction could be attributed to asset sales, reduced investment in projects, or other capital management strategies.

Economic Profit Trend

Economic profit consistently registered as a negative value throughout the period. The largest loss occurred in 2020, at US$18,344 million, coinciding with the lowest NOPAT and a relatively high cost of capital. Losses decreased in subsequent years, reaching US$4,855 million in 2023, reflecting the improvement in NOPAT and the initial decline in the cost of capital. Despite the reduction in the loss, the continued negative economic profit indicates that the company’s returns are not exceeding its cost of capital.

The interplay between NOPAT, cost of capital, and invested capital significantly influenced economic profit. The substantial decline in NOPAT in 2020, coupled with a considerable invested capital base, resulted in the largest economic loss. The subsequent recovery in NOPAT and reduction in invested capital partially offset this loss, but the company has yet to generate economic profit.

The annual financial data exhibits significant fluctuations in profitability and operating performance over the analyzed periods.

Net income (loss)

The net income demonstrates a positive trend in the initial years, with values of 3,152 million USD in 2018 and a slight decrease to 2,990 million USD in 2019. However, a dramatic shift occurred thereafter, with net income turning negative in 2020 at -10,236 million USD. This substantial loss persisted through 2021 and 2022, albeit with a gradual improvement from -9,501 million USD to -6,093 million USD. By 2023, the net loss narrowed substantially to -74 million USD, indicating a near return to breakeven status.

Net operating profit after taxes (NOPAT)

The NOPAT followed a somewhat similar pattern to net income, starting at 3,339 million USD in 2018 and declining slightly to 3,226 million USD in 2019. A sharp reversal occurred in 2020, with NOPAT plunging to -9,312 million USD, reflective of significant operational challenges. While losses continued in 2021 and 2022, the operating profit losses reduced over time from -7,863 million USD to -4,485 million USD. Notably, in 2023, NOPAT turned positive at 2,207 million USD, suggesting a substantial recovery in operating performance.

Overall, the trends indicate that the entity faced severe financial difficulties starting in 2020, likely related to adverse external conditions impacting operational and net profitability. Despite initial sharp declines, a progressive improvement is evident in subsequent years, culminating in a recovery towards profitability by 2023 at the operating profit level and a significant reduction in net losses.

The financial data reveals distinct trends in the income tax expense and cash operating taxes over the examined period, reflecting significant fluctuations influenced by various operational or external factors.

Income Tax Expense (Benefit), Net

This item exhibited an increasing trend from US$54 million in 2018 to a peak of US$71 million in 2019, indicating a rise in tax obligations. The period of 2020 and 2021 shows a reversal into negative territory with values of -US$17 million and -US$21 million respectively, suggesting tax benefits or credits were realized during these years. This could be indicative of losses or deferred tax assets being recognized. In 2022 and 2023, the tax expense returned to positive figures, with US$13 million and US$12 million respectively, but remained substantially lower than the 2018-2019 levels, signaling a partial recovery or stabilization in taxable income.

Cash Operating Taxes

The cash operating taxes followed a similar pattern initially, increasing from US$57 million in 2018 to US$77 million in 2019. Subsequently, this measure also dipped below zero in 2020 and 2021, reflecting negative cash flows from operating tax payments of -US$15 million and -US$17 million respectively, which may align with tax refunds or credits received. Notably, in 2022, the cash operating taxes returned to a positive amount of US$10 million, but a dramatic decline occurred in 2023 with a significant cash outflow reported as -US$358 million. This sharp negative value could suggest a sizeable tax refund, an adjustment, or a one-off tax-related cash inflow that sharply contrasts with prior periods and warrants further investigation to understand underlying causes.

Overall, the data portrays an environment of considerable tax-related volatility over the six-year span. The movement from positive to negative tax expenses and cash taxes from 2020 onwards may reflect the impact of external economic factors, regulatory changes, or internal losses. The substantial negative cash operating tax figure in 2023 is a prominent outlier that markedly differs from past trends, highlighting a need for a deeper review to ascertain the reasons behind such a significant cash tax flow reversal.

Total Reported Debt & Leases

There is a significant upward trend in total reported debt and leases from 2018 to 2022, increasing from approximately $10.7 billion to $35.9 billion. This represents more than a threefold rise over this period. However, in 2023, a noticeable reduction occurred, bringing the debt down to around $31.9 billion. The substantial increase through 2022 suggests heightened leverage or increased borrowing, followed by some deleveraging or debt repayment in the most recent year.

Shareholders’ Equity

Shareholders' equity experienced a declining trend during the period, dropping from about $24.4 billion in 2018 to $6.9 billion in 2023. The decline was particularly steep between 2019 and 2022, with equity falling nearly by 70%. The reduction in equity indicates a possible decrease in net assets, which could result from accumulated losses, dividend payments exceeding earnings, or other equity-reducing events.

Invested Capital

Invested capital showed an initial increase from $35.1 billion in 2018 to a peak of about $49.0 billion in 2020. After reaching this peak, invested capital declined consistently through 2023, dropping to approximately $39.4 billion. The peak in 2020 followed by a decline suggests changes in the company’s asset base or capital structure, reflecting possible asset disposals, depreciation, or adjustments in working capital.

Overall Insights

The data reveals a period marked by increased borrowing and reduced equity, resulting in elevated financial leverage. While debt surged until 2022, some repayment or restructuring actions in 2023 led to a partial reduction in liabilities. Simultaneously, the decline in shareholders' equity points to weakened net asset positions. The fluctuations in invested capital align with these changes, indicating active management of capital resources amid shifting financial conditions.

The economic spread ratio demonstrates a consistent, though moderating, negative trend over the observed period. Initially negative, the ratio becomes substantially more negative before exhibiting improvement in later years. This movement correlates with fluctuations in economic profit and invested capital.

Economic Spread Ratio Trend

The economic spread ratio began at -18.26% in 2018 and decreased to -37.42% in 2020, representing the most significant negative spread during the analyzed timeframe. A subsequent improvement is observed, with the ratio reaching -12.31% in 2023. This indicates a lessening of the gap between the cost of capital and the returns generated from invested capital, though the spread remains negative.

Economic profit consistently registers as a negative value throughout the period, indicating that the company’s returns are insufficient to cover the cost of capital. The magnitude of the economic loss decreases from 2020 to 2023, aligning with the improvement in the economic spread ratio.

Invested Capital

Invested capital increased from US$35,074 million in 2018 to US$49,017 million in 2020. Following 2020, invested capital decreased each year, reaching US$39,428 million in 2023. This decrease in invested capital may contribute to the observed improvement in the economic spread ratio in the later years, as a smaller capital base requires a lower level of economic profit to achieve a positive spread.

The combined effect of decreasing economic losses and a reduction in invested capital suggests a potential shift towards improved capital allocation efficiency. However, the continued negative economic spread ratio indicates that the company is still not generating returns sufficient to cover its cost of capital, even with the observed improvements.

Correlation between Metrics

The economic spread ratio’s movement is directly influenced by both economic profit and invested capital. The largest negative spread in 2020 coincides with the largest economic loss and the highest level of invested capital. Conversely, the improvement in the ratio in 2022 and 2023 is associated with reduced economic losses and a decrease in invested capital.

The economic profit margin demonstrates a highly volatile pattern over the observed period. Initially negative, the margin experienced substantial deterioration before showing signs of improvement in the most recent year.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at -33.92%. This figure improved slightly to -30.84% in 2019. However, 2020 witnessed a dramatic decline, with the margin plummeting to -327.87%. This negative trend continued into 2021, reaching -825.66%, representing the lowest point in the observed period. A significant, though incomplete, recovery began in 2022, with the margin improving to -91.73%. This positive momentum continued into 2023, with the economic profit margin reaching -22.48%, the highest value within the timeframe.

The economic profit margin’s movement closely mirrors the fluctuations in revenues. The substantial declines in the margin during 2020 and 2021 coincide with the lowest revenue figures during those years. The subsequent improvement in the margin in 2022 and 2023 aligns with the recovery and growth in revenues.

Relationship to Economic Profit

The economic profit margin is consistently negative throughout the period, indicating that the company’s economic profit is negative in each year. The magnitude of the negative economic profit margin directly reflects the size of the negative economic profit. As economic profit decreased from 2018 to 2021, the economic profit margin became increasingly negative. The reduction in the negative economic profit in 2022 and 2023 is reflected in the corresponding improvement in the economic profit margin.

The substantial volatility in the economic profit margin suggests a sensitivity to revenue changes and underlying economic profitability. While the trend in 2022 and 2023 indicates a positive shift, the margin remains negative, signifying that the company is not yet generating returns exceeding its cost of capital.