Royal Caribbean Cruises Ltd. (NYSE:RCL)

The period under review demonstrates a consistent pattern of negative economic profit, alongside fluctuations in the underlying components. Net operating profit after taxes (NOPAT) initially increased before experiencing substantial declines, while the cost of capital decreased over time. Invested capital generally increased, though a slight decrease is observed in the most recent year. These factors combined to produce consistently negative economic profit figures throughout the analyzed timeframe.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited growth from 2017 to 2019, increasing from approximately US$1.9 billion to US$2.3 billion. However, a significant downturn occurred in 2020, with NOPAT falling to a loss of approximately US$4.9 billion. This negative trend continued into 2021, though the loss moderated slightly to approximately US$4.0 billion. The substantial declines in NOPAT from 2019 to 2020 and 2021 likely reflect external factors impacting operations.

Cost of Capital

The cost of capital demonstrated a consistent downward trend, decreasing from 30.22% in 2017 to 19.93% in 2021. This reduction suggests a decreasing risk profile or changes in the company’s capital structure and financing costs over the period. Despite this decline, the cost of capital remained substantial throughout the period.

Invested Capital

Invested capital generally increased from US$18.1 billion in 2017 to US$28.4 billion in 2020. A slight decrease was observed in 2021, with invested capital falling to US$26.3 billion. The increase in invested capital suggests expansion or investment in assets, while the 2021 decrease could indicate asset sales or a reduction in investment.

Economic Profit

Economic profit remained negative throughout the entire period. The magnitude of the negative economic profit increased significantly from 2017 to 2020, reaching a low of approximately US$11.2 billion. While the negative economic profit lessened somewhat in 2021 to approximately US$9.2 billion, it remained substantial. This indicates that the company’s returns on invested capital were consistently below its cost of capital.

The combination of declining NOPAT and a consistently high cost of capital, despite the cost of capital’s downward trend, resulted in persistently negative economic profit. The fluctuations in invested capital appear to have a secondary effect on economic profit, but are not the primary driver of the observed negative values.

The financial data reveals significant fluctuations in the company's profitability over the five-year period.

Net income (loss) attributable to Royal Caribbean Cruises Ltd.

From 2017 to 2019, net income exhibited a steady increase, rising from approximately $1.63 billion to nearly $1.88 billion. However, the years 2020 and 2021 show a drastic reversal to substantial net losses, amounting to negative $5.80 billion and negative $5.26 billion respectively. This sharp decline reflects a critical downturn in net profitability during these latter years.

Net operating profit after taxes (NOPAT)

Similarly, NOPAT increased consistently from about $1.90 billion in 2017 to approximately $2.33 billion in 2019, demonstrating a positive operational performance before taxes. In contrast, 2020 and 2021 recorded significant negative NOPAT values, at nearly negative $4.92 billion and negative $3.96 billion respectively, signaling severe operational challenges impacting the company’s profitability after tax obligations.

Overall, the data indicates a period of strong financial performance up until 2019, followed by a sharp deterioration in both net income and operational profitability in the subsequent two years. The magnitude of losses recorded in 2020 and 2021 suggests substantial adverse impacts on the company's financial health during this period.

Income Tax (Expense) Benefit

The income tax benefit showed an increasing trend from 2017 to 2019, rising from 18,300 thousand US dollars in 2017 to 32,600 thousand US dollars in 2019. However, there was a significant reversal in 2020 and 2021, with the figures turning into expenses of 15,000 thousand and 45,200 thousand US dollars respectively. This indicates a shift from tax benefits to tax expenses in these two years, suggesting a possible change in profitability, tax regulations, or financial strategy.

Cash Operating Taxes

Cash operating taxes followed a similar pattern to the income tax benefit, increasing steadily from 21,373 thousand US dollars in 2017 to 39,556 thousand US dollars in 2019. In 2020 and 2021, there was a sharp decline turning into negative values of 12,780 thousand and 34,028 thousand US dollars respectively. This negative value implies possible tax refunds, credits, or adjustments during these years, which aligns with the shift observed in income tax figures.

Overall Insight

The data reflects a period of consistent growth in tax-related expenses and benefits until 2019, followed by a sudden and marked change in 2020 and 2021. The switch from positive to negative figures likely indicates an unusual financial situation or external impact affecting taxable income and tax payments during the latter years, possibly linked to broader economic factors or company-specific events.

Total Reported Debt & Leases

The total reported debt and leases increased significantly over the period analyzed. Starting from approximately $7.7 billion at the end of 2017, it rose markedly to about $11.3 billion by the end of 2018. The upward trend continued with a smaller increase to $11.7 billion by the end of 2019, followed by a very sharp rise to nearly $20.0 billion at the end of 2020. By the end of 2021, the figure further increased to around $21.7 billion. This reflects a consistent and steep growth in the company's leverage position over the five-year period.

Shareholders’ Equity

Shareholders’ equity showed a fluctuating and ultimately declining trend. Starting at approximately $10.7 billion at the end of 2017, it rose slightly to about $11.1 billion in 2018, and then further increased to $12.2 billion at the end of 2019, marking the highest level within the timeframe. However, by the end of 2020, equity decreased sharply to around $8.8 billion. This downward trajectory continued in 2021, with equity dropping significantly to approximately $5.1 billion. The decline suggests a reduction in net asset value, possibly indicating losses, dividend payments, or other factors reducing equity.

Invested Capital

Invested capital demonstrated an overall upward trend with some volatility. It increased from about $18.1 billion at the end of 2017 to approximately $22.8 billion in 2018, continuing to climb to $24.2 billion at the end of 2019. A notable increase occurred by the end of 2020, reaching about $28.4 billion. However, by the end of 2021, invested capital decreased to roughly $26.3 billion. This pattern indicates ongoing investment or capital deployment, particularly between 2019 and 2020, with a slight contraction observed in the final period.

Overall Insights

The data reveals a pronounced increase in total debt and leases, especially during 2020 and 2021, suggesting increased borrowing or lease commitments, possibly to support operations or capital expenditures during challenging periods. Meanwhile, shareholders’ equity experienced a marked decline after 2019, which could signal operational difficulties, impairments, or significant distributions. Invested capital's growth until 2020 suggests increased resource commitment, with a slight reduction in 2021 potentially reflecting asset disposals or changes in capital structure. The combination of rising debt and falling equity points to increased financial leverage and potential risk in the company’s capital structure.

The economic spread ratio demonstrates a consistently negative trend over the observed five-year period. This indicates that the company’s returns on invested capital have been consistently lower than its cost of capital. The magnitude of the negative spread has fluctuated, with a notable increase in negative performance during 2020.

Economic Spread Ratio Trend

The economic spread ratio began at -19.74% in 2017 and improved slightly to -14.80% in 2019. However, 2020 saw a substantial decline to -39.26%, representing the most significant negative spread within the period. A partial recovery occurred in 2021, with the ratio moving to -34.98%, though remaining considerably negative.

The economic profit consistently reflects negative values throughout the period, aligning with the negative economic spread ratio. While the invested capital generally increased from 2017 to 2021, the negative economic profit suggests that this increased investment did not generate sufficient returns to cover the cost of capital.

Relationship between Economic Profit and Invested Capital

Invested capital increased from US$18,110,618 thousand in 2017 to US$28,435,034 thousand in 2020, before decreasing slightly to US$26,323,667 thousand in 2021. Despite this growth in invested capital, economic profit remained negative across all years, and the absolute value of economic profit increased significantly in 2020, coinciding with the largest negative economic spread ratio.

The worsening of the economic spread ratio in 2020, followed by a modest improvement in 2021, warrants further investigation. The substantial decline in 2020 likely reflects the impact of external factors, while the 2021 result suggests a potential, but incomplete, recovery in profitability relative to invested capital.

The economic profit margin demonstrates a consistently negative trend over the observed period. Initially negative, the margin deteriorated significantly, reaching substantial negative values in the later years. This indicates that the company’s returns are consistently failing to cover the cost of capital employed.

Economic Profit Margin Trend

In 2017, the economic profit margin was -40.73%. This value worsened to -42.97% in 2018, representing a further decline in profitability relative to the cost of capital. A slight improvement was noted in 2019, with the margin decreasing to -32.66%. However, this improvement was short-lived. The margin experienced a dramatic decrease in 2020, reaching -505.40%, and continued to deteriorate in 2021, ending at -601.01%.

The substantial negative shift in the economic profit margin in 2020 and 2021 coincides with a significant reduction in revenues. While economic profit was consistently negative throughout the period, the magnitude of the loss increased substantially as revenues declined. This suggests a strong correlation between revenue generation and the ability to achieve positive economic profit.

Relationship between Revenues and Economic Profit Margin

Revenues increased from US$8,777,845 thousand in 2017 to US$10,950,661 thousand in 2019. During this period, the economic profit margin fluctuated but remained within a relatively narrow range. However, revenues decreased sharply in 2020 to US$2,208,805 thousand and further declined in 2021 to US$1,532,133 thousand. This revenue decline was accompanied by a dramatic worsening of the economic profit margin, indicating that the company’s ability to generate economic profit is highly sensitive to revenue levels.

The consistently negative economic profit, coupled with the escalating margin, suggests that the company is destroying economic value. The increasingly negative margin highlights a growing disparity between the returns generated and the cost of capital, indicating a need for strategic review and potential adjustments to capital allocation or operational efficiency.