Down 54% year to date, Carnival (CCL 3.57%) stock has dropped substantially in 2022. And while that might garner the attention of bargain-hungry investors, it may pay to look before you leap at the shares. The company's cash burn and overleveraged balance sheet could become major problems, especially as global macroeconomic challenges like inflation and rising interest rates mount. 

1. The recovery is incomplete

Carnival is the global leader in cruise ship operations, with a market share of 45%. But the company's scale and geographic diversification were not enough to shield it from the impacts of the COVID-19 pandemic -- a crisis it is still struggling to recover from

Third-quarter revenue came in at $4.3 billion. And while this is a massive improvement from the $546 million earned in the prior-year period, it is still far from the $6.53 billion the company generated in Q3 2019. 

Management is committed to "closing the gap" with 2019. But this might be easier said than done. The good news is that Carnival relaxed some of its remaining COVID-19 protocols. 

Now guests don't need to present proof of vaccination or negative COVID-19 test results for trips of 15 nights or less, but it is unclear if Carnival is capable of handling pre-COVID passenger volume. During the crisis, the company sold 18 cruise ships (almost 20% of its fleet) to raise capital and cut costs while operations were halted. Although this move probably made sense at the time, it could come back to bite. 

According to management, 95% of Carnival's capacity is already serving guests. This means that to drive continued growth, the company may have to hike prices (which could hurt demand) or expand its capacity by buying new vessels -- a difficult option considering its poor cash flow. 

2. Carnival is still burning through money

While Carnival reported third-quarter adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $303 million, investors shouldn't take that number at face value. As a cruise operator, Carnival owns a fleet of aging ships that will eventually need to be replaced, so ignoring depreciation (which totaled a whopping $581 million in the period) would paint an inaccurate view of its financial situation. 

Red arrow moving downward with $100 bills in the background.

Image source: Getty Images.

When adding the third quarter's interest expense of $422 million on top of the depreciation, Carnival's EBITDA profitability begins to look meaningless. 

Over the coming years, the company's management will face the herculean task of repairing and replacing its ships while simultaneously paying off mounting interest expenses and long-term debt (totaling $28.5 million). This would be difficult even in a good economy, but with rising interest rates and a possible recession on the horizon, the embattled cruise operator could be sailing into another crisis before it has fully recovered from the previous one. 

Shares are not cheap

Carnival's recent declines make the stock look cheap. But a low-priced stock isn't always a good deal -- especially when it comes with a lot of debt and no clear pathway to paying it off. While the company might survive these challenges over the long term, investors who bet on it now risk significant downside because the future looks very difficult.