Will Icon Of The Sea be able to give investors a ride?

365 meters, 7600 passengers, 2350 crew, 19 decks and 2805 cabins. This is how Icon Of The Seas turned out — the largest ship in the world, which is even longer than the US Navy Gerald R. Ford by as much as 32 meters.

The flagship of Royal Caribbean Cruises (NYSE: RCL) has already returned from her maiden voyage to the Caribbean islands. The ship’s construction, which is almost 5 times larger than Titanic, cost the company $2 billion. Prices for a 7-day tour start at $5,000, and travel can be booked as early as 2025 and 2026.

Icons of the Seas engines run on liquefied natural gas, which Royal Caribbean says is cleaner than previous fuel generations. The new ship is 24% more energy efficient than modern shipping regulations require. The company also noted that they plan to make the ship with zero emissions by 2035.

«With each new ship, we raise the bar in the travel industry while enhancing what our guests know and love,» said Jason Liberty, president and CEO of Royal Caribbean Group.

This sounds great and exciting, but can the company’s shareholders look forward to a bright future in RCL stocks? Let’s overview the company’s financial performance and understand the potential risks or growth drivers.

Taking into account the Covid pandemic the stock prices have not yet reached the peak they were at at the beginning of 2020. The pandemic destroyed the company’s income, almost destroying the company itself. Moreover, have you ever seen negative revenue from such a mature company? Royal Caribbean recorded negative revenue of $33.7 mln for the 3q 2020.

However, as you can see, the company’s revenue has recovered and even exceeded the values of pre-crisis times. Of course, these times could not pass without a trace for the company’s business, which had to continue to fulfill its obligations and introduce new ships into its fleet.

By the way, Icon Of The Seas was ordered back in 2016, and construction began in 2021! Not the best moment for such a giant project, don’t you think?

RCL, which has historically always kept its total debt within the limits of its equity capital, was forced to shift its balance sheet sharply towards aggressive borrowing.

Despite the positive trend in recent quarters, the Debt-equity ratio is still at an abysmal level of 5.4.

So, income has recovered. The debt burden is significant — and this is the main risk we suppose. Return on equity (ROE) is not representative due to the undervaluation of capital, so don’t look at numbers that high. We know that it is formed due to the large equity multiplier. But return on invested capital (ROIC) is quite indicative — only 9%.

Considering the above points and other indicators we use to evaluate the company, we feel that investing in RCL stock is an extremely risky investment idea. The fact is that the rating is significantly lower than it was before the fall of 2020. Given that the price has almost reached its peak, the company is now trading much higher than its historical average P/E.