The cruise industry is getting more and more capital-intensive as newer, more expensive ships are introduced with better amenities. So companies in the industry require huge capital to finance their capital expenditure. As of December 31, 2013, Royal Caribbean operated 41 ships and had a total capacity of 98,750 berths or ~23% of the global capacity. It has another eight ships that will be delivered between 2014 and 2018.
You can see from Royal Caribbean’s (RCL) capital structure that the company has relied more on debt financing to finance its capital expenditure. As of 3Q14, Royal Caribbean’s (RCL) debt as a percentage of capital was ~44%—much higher than Carnival Corporation’s (CCL) 26% but lower than Norwegian Cruise Line’s (NCLH) 55%.
You can invest in shares of these companies through ETFs such as the PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ), the PowerShares Dynamic Large Cap Growth Portfolio (PWB), and the Consumer Discretionary Select Sector SPDR Fund (XLY). High leverage increases interest expenses and has a negative impact on net income and earnings per share. High interest expenses were the primary reason for Royal Caribbean’s and Norwegian Cruise’s lower net margin, as we discussed in the previous article of this series.
Debt-to-EBITDA[1. earnings before interest, tax, depreciation, and amortization] is a measure of the company’s ability to pay off its debt. The ratio calculates the time required to pay off debt. A low ratio implies that the company takes less time to pay off debt and can take on more debt when required, so these companies get a better credit rating. In 2013, Royal Caribbean’s debt-to-EBITDA was 4.2x—higher than Carnival Corporations (CCL) 2.7x, but lower than Norwegian Cruise Line’s (NCLH) 4.3x.