Royal Caribbean Cruises Ltd. (NYSE:RCL) closed at $277.74 on October 2 after reporting net income of $4.4 billion over the past twelve months.
Over the same twelve months, the company’s levered free cash flow was negative. Both statements describe the same twelve months. Reconciling them explains most of what this business is.
READ ALSO: Here is Why Tripadvisor (TRIP) is a Bad Investment at Today’s Price
The Money Went Into Ships:
Royal Caribbean generated $6.79 billion of operating cash flow. That is cash the business actually collected after paying its crew, its fuel bills and its interest.
Free cash flow was minus $1.52 billion. The gap between those two figures is what the company spent on building and buying ships. That is roughly $8 billion of capital spending in a year, from a company worth $62.82 billion.
A cruise line is not really a holiday company. It is a shipbuilding operation with a hotel attached, and the ships cost more than the profit they generate until they are paid for. Which is why the balance sheet looks the way it does. Royal Caribbean carries $23.52 billion of debt against $876 million of cash.
DON’T MISS: Costco (COST) vs Walmart (WMT): Which is a Better Stock to Buy?
Why That Is Not Automatically Bad:
Negative free cash flow sounds alarming but not always is. There is a difference between a company that cannot fund itself and one that is choosing to build. A new ship earns revenue for about thirty years, so spending ahead of the cash is how the industry has always worked.
The market is not treating this as distress. Investors pay 6.14 times book value for Royal Caribbean, which means they believe the fleet is worth several times what the accounts carry it at.
You do not pay six times book for assets you think are being wasted. The test is whether the spending stops. A fleet that is finished throws off cash immediately, because the depreciation continues while the capital spending falls away.
Until then, the dividend is being paid from borrowings rather than surplus. Royal Caribbean yields 2.16% on a payout ratio of 30.88%, and both figures look comfortable only if you ignore where the cash is going. There are many businesses generating free cash flow rather than consuming it. You can find some here.
The Valuation Case:
Royal Caribbean closed at $277.74 on October 2, down 12.47% over twelve months. Enterprise value is the figure that matters here, not market cap. A measure of $85.46 billion against a market value of $62.82 billion means roughly a quarter of what a buyer would pay for this company is the debt they would inherit.
That is the honest price. On earnings, the stock looks cheap, and on enterprise value it looks ordinary. Sustainability depends on something outside the accounts. Cruise demand has been strong, and the capital spending assumes it stays that way for the thirty years each ship is meant to earn.
A beta of 1.75 is the market’s one-line summary. Debt of that size against a discretionary purchase means the shares move almost twice as hard as the index in either direction. We ranked this year’s best-performing dividend payers here.
Conclusion:
The gap between profit and cash is explained rather than hidden. Royal Caribbean is building ships, the ships earn for decades, and six times book value says the market believes they are worth it. However, $23.52 billion of debt against $876 million of cash leaves no margin for a weak season, and the dividend is currently funded by borrowing rather than by surplus cash. The number to watch is capital spending, because free cash flow turns positive the moment it slows.
Market Sentiment:
Royal Caribbean Cruises Ltd. was held by 56 hedge funds with a combined stake value of about $0.96 billion at the end of Q2 2026 in the Insider Monkey database. This is up from 53 hedge fund holders with a cumulative investment value of around $1.19 billion in the previous quarter.
READ NEXT: Is Best Buy’s (BBY) Moat Narrowing as Electronics Move Online for Good? and What is eBay’s (EBAY) Economic Moat, and is it Widening or Narrowing?
This article is originally published at Insider Monkey.
