Carnival Corp. & plc (NYSE:CCL)

The period under review demonstrates significant fluctuations in financial performance, particularly concerning economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, transitioning from positive values to substantial losses before recovering in the most recent year. The cost of capital decreased over the majority of the period, but increased in the final year. Invested capital initially rose, peaked, and then declined. Consequently, economic profit remained consistently negative throughout the observed timeframe, though the magnitude of the loss lessened in later years.

NOPAT Trend

NOPAT began at US$3,339 million in 2018 and decreased slightly to US$3,226 million in 2019. A dramatic decline followed in 2020, resulting in a loss of US$9,312 million. Losses continued in 2021 (US$7,863 million) and 2022 (US$4,485 million) before a substantial recovery to a profit of US$2,207 million in 2023. This suggests a period of significant operational challenges followed by a return towards profitability.

Cost of Capital Trend

The cost of capital decreased from 27.91% in 2018 to 15.18% in 2022. However, it increased to 17.97% in 2023. This decrease likely reflects changes in market conditions and the company’s risk profile, while the increase in the final year could be due to rising interest rates or perceived increased risk.

Invested Capital Trend

Invested capital increased from US$35,074 million in 2018 to US$38,330 million in 2019, then rose significantly to US$49,017 million in 2020. It subsequently decreased to US$46,517 million in 2021, US$44,143 million in 2022, and further to US$39,428 million in 2023. This pattern may indicate strategic investments followed by divestitures or asset reductions.

Economic Profit Trend

Economic profit was negative throughout the entire period. The losses widened from US$6,449 million in 2018 to US$18,377 million in 2020, coinciding with the largest NOPAT loss and peak invested capital. Losses lessened to US$15,783 million in 2021, US$11,185 million in 2022, and US$4,880 million in 2023, reflecting the recovery in NOPAT and the reduction in invested capital. While still negative, the decreasing magnitude of the economic loss suggests improving value creation in the later years.

The consistent negative economic profit indicates that the company’s returns on invested capital have been insufficient to cover its cost of capital throughout the analyzed period. The recent trend of diminishing losses, however, suggests a potential improvement in the company’s ability to generate value.

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 pattern of negative values over the observed period, indicating that the company’s return on invested capital has been less than its cost of capital each year. However, the magnitude of this negative spread has shown fluctuation and, more recently, improvement.

Economic Spread Ratio Trend

The economic spread ratio began at -18.39% in 2018 and decreased to -37.49% in 2020, representing the most significant negative spread during the analyzed timeframe. A subsequent improvement is observed, with the ratio moving to -25.34% in 2022 and further to -12.38% in 2023. This suggests a narrowing gap between the company’s returns and its cost of capital in the latter years.

The economic profit consistently reflects negative values, mirroring the negative economic spread ratio. The largest negative economic profit occurred in 2020 at -18,377 US$ million, coinciding with the most negative economic spread. Economic profit improved significantly in 2023 to -4,880 US$ million, aligning with the improved economic spread ratio.

Invested Capital

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

The combined trends suggest that while the company has consistently failed to generate returns exceeding its cost of capital, the situation has improved in recent years. The reduction in invested capital, coupled with an increase in economic profit, has contributed to a less negative economic spread ratio.

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 and 2019, the economic profit margin was negative, registering at -34.15% and -31.04% respectively. This indicates that the company’s economic profit was less than zero in both years, meaning the return generated was below the cost of capital. A slight improvement was observed from 2018 to 2019, though the margin remained substantially negative.

The year 2020 witnessed a dramatic decline, with the economic profit margin plummeting to -328.45%. This substantial decrease coincided with a significant reduction in revenues. The following year, 2021, saw a further worsening, reaching -827.22%, despite a modest increase in revenues. This suggests that while revenues began to recover, the cost of capital remained high relative to the economic profit generated.

In 2022, the economic profit margin improved considerably to -91.92%, alongside a substantial increase in revenues. This indicates a positive, though still negative, correlation between revenue growth and margin improvement. The most recent year, 2023, showed a further, significant improvement, with the margin reaching -22.60%. This represents the highest value within the observed period and suggests a strengthening of the company’s ability to generate economic profit, though it remains below zero.

The magnitude of the fluctuations in the economic profit margin suggests a sensitivity to both revenue levels and the cost of capital. The substantial negative values in 2020 and 2021 highlight the challenges faced during those years, while the improvement in 2022 and 2023 indicates a potential recovery in economic profitability.

Relationship to Revenues

A clear relationship exists between revenues and the economic profit margin. Years with lower revenues, such as 2020 and 2021, were associated with significantly more negative margins. Conversely, years with higher revenues, like 2019, 2022, and 2023, showed less negative or improving margins. This suggests that revenue generation is a critical factor in improving economic profitability.

The trend indicates a move towards improved economic profitability, but continued negative economic profit margins suggest the company is still not generating returns exceeding its cost of capital.