Few industries were as battered by the economic impacts of the COVID-19 pandemic as the cruise industry. Companies like Carnival Corporation (CCL -2.75%) saw losses spiral amid lockdowns and a no-sail order to control the crisis. Now sales are rebounding, but the company's operating losses and massive debt load could spell trouble for investors. 

Third-quarter earnings highlight the problem

It's safe to say many of the impacts of the COVID-19 pandemic are behind us, and companies are free to resume relatively normal operations. But the scars of that difficult period still show in Carnival's financial reports. Third-quarter earnings highlight the problem.

Cruise ship sailing in the evening.

Image source: Getty Images.

Revenue surged 688% year-over-year to $4.3 billion (up from $546 million in the prior year period). And while this demonstrates that Carnival is bouncing back from the worst impacts of the pandemic, it's a case of easy comparisons more than anything else. Revenue was abnormally low in 2021 because of COVID-19 related challenges.

Sales are still down 34% from the $6.5 billion generated in the corresponding period of 2019. And with 95% of Carnival's capacity already serving guests (management sold 19 ships to raise capital during the shutdown), it is unclear how much room the company has to grow without having to undertake expensive capital expenditures to rebuild its fleet. 

The biggest problem is profitability. On its own, Carnival's operating loss of $279 million is a massive improvement from the $2.1 billion lost this time last year. But the company has bills to pay -- expensive bills. With a whopping $28.5 billion in long-term debt, interest expense alone (which totaled $422 million in the period) will be a major headache. The debt itself could become a bankruptcy risk, especially as macroeconomic conditions in the U.S. continue to sour. 

Rising rates make debt more expensive

As a heavily indebted company with limited cash flow, Carnival will likely have to rely on debt refinancing to avert bankruptcy -- a way of kicking the can down the road by taking on new debt to pay off old debt. In October the company used 12 ships as collateral for a $2 billion bond priced with a coupon rate (the interest paid out) of roughly 11.4% annually.

However, with the Federal Reserve steadily increasing interest rates to bring down inflation, investors should expect the refinancing strategy to become more expensive, and perhaps unsustainable, in the future. Higher rates could also increase the interest expense on Carnival's existing debt. The company reports that around 39% of its debt featured floating rates as of August 2022, so this could be another pressure point going forward. 

A cheap stock isn't always a good deal 

Down 59% year-to-date, Carnival Corporation trades at a substantial discount to its previous highs, even as operations dramatically improve in the wake of the COVID-19 pandemic. But soaring sales and narrowing losses might not be enough to save the company from its mountain of debt, especially as challenges like rising interest rates make the problem more difficult to handle. Investors should avoid the stock until these issues are resolved.