Conditions continue to improve for the business supporting Carnival (CCL 3.57%) stock. With rising passenger counts, its ships could return to pre-pandemic capacity levels.

However, the cruise line stock faces one nagging issue that could depress stock price growth for years. Hence investors need to look at Carnival's green flags and red flags before deciding whether to buy the dip.

Green flag: Carnival is almost back to normal

After a devastating shutdown, Carnival is well on the way to recovery by most measures. According to Cruise Market Watch, the company claims 42% of the passenger count and 37% of revenue generated within the industry. This means Carnival's reign as the No. 1 cruise line continues, keeping it ahead of peers such as Royal Caribbean and Norwegian Cruise Line Holdings.

Moreover, in the fiscal third quarter of 2022 (which ended Aug. 31), Carnival claimed almost 84% occupancy, improving 15 percentage points in just one quarter. The industry defines 100% occupancy as two passengers per room, and Carnival commonly operated at over 100% before the pandemic.

Also, in fiscal Q3, revenue rose to more than $4.3 billion. While that lags Q3 2019 by 34%, it is up nearly eightfold year over year. Amid the lower revenue, Carnival lost $770 million during the same quarter.

However, the company reports more than $7 billion in cash on its balance sheet. That means it can absorb losses for now. Additionally, analysts forecast a return to profitability next year, which should reduce worries about Carnival's future.

Red flag: It still has massive debt

However, that improvement has done little for Carnival stock. It trades in the $10 per share range, a massive drop from its peak in early 2018 when it sold for over $70 per share.

Unfortunately for investors long on Carnival, a business recovery may do little to bring about a recovery in its stock. The pandemic shut down the company for 15 months, leaving it without a significant source of revenue. This means it had to borrow billions to maintain fixed assets.

Those conditions devastated its balance sheet. In the fiscal third quarter of 2019, Carnival carried approximately $9 billion in corporate debt and held more than $25 billion in shareholders' equity. By Q3 2022, that debt exploded to around $31 billion. Additionally, the pandemic reduced the company's value, and shareholders' equity now stands at just over $8 billion.

Indeed, cruise line stocks Royal Caribbean and Norwegian face similar debt issues, meaning this will not necessarily turn into a competitive disadvantage. Still, investors should expect years of pain, and that becomes increasingly apparent when evaluated against the fiscal 2019 financials.

Carnival reported nearly $3 billion in net income in 2019. However, even if it returned to that level of profitability, it would take at least seven years just to return to 2019 debt levels. That likely translates to years of stagnation, even if the business prospers again.

Should I consider Carnival?

Given the level of company indebtedness, investors should probably avoid this stock. Considering the pace of Carnival's recovery, cruising seems to remain a popular mode of travel, and the industry should drive higher revenues and, eventually, profits.

Unfortunately for its stockholders, the legacy of Carnival's pandemic shutdown -- namely, its debt -- will probably remain with the company for several years. Considering that obstacle, investors should consider stocks without such a heavy financial burden.