Arguably, no industry was hit harder by the pandemic than cruise lines.

Cruises were completely shut down for about a year in the U.S., and while land-based travel has been relatively quick to recover along with travel stocks in general, the cruise industry has lagged behind.

Of the three major cruise stocks -- Royal CaribbeanNorwegian Cruise Line, and Carnival (CCL 0.06%) -- Carnival is both the largest and the worst performer since the pandemic struck. However, the company's most recent earnings report offers some hope for investors as the cruise leader could finally be ready to mount a turnaround.

Let's take a closer look.

A woman on the railing of a cruise ship.

Image source: Getty Images.

Business is back

In its fiscal first quarter, Carnival's revenue reached $4.4 billion, more than doubling from the quarter a year ago, but more importantly, that represented 95% of 2019 levels, meaning the company had nearly recouped its lost business during the quarter.

Even better, booking trends were strong, which was especially promising considering much of the world is facing the threat of a recession. The company said it recorded the highest booking volumes for any quarter in its history, and it's broken booking records for both the North America and Australia and Europe segments.

Customer deposits in the quarter came in at a record $5.7 billion, up 16% from the previous record of $4.9 billion in 2019. The company was also guiding for occupancy of 100% or higher (kids and other extra-room guests can push the percentage above 100).

CEO Josh Weinstein touted the company's bookings, saying Carnival was having "a phenomenal wave season," referring to the promotional period in the cruise industry. 

What about the balance sheet?

Customer demand is one thing, but Carnival has long been plagued by a large debt burden and heavy interest payments, which have only gotten worse during the pandemic. However, the company seems to be turning the corner with its balance sheet, telling investors that its debt balance has peaked and it plans to reduce it over time. 

With a current liquidity position of $8.1 billion, Carnival has more than enough cash to reassure investors that it can return to positive cash flow, especially considering the tailwinds from new bookings.

While the company expects a generally accepted accounting principles (GAAP) loss this year, it said cash from operations turned positive and expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $3.9 billion-$4.1 billion.

At a market cap of $14 billion, the stock trades at just 3.5 times that EBITDA range. On the other hand, the company paid $539 million of interest expense in the first quarter and had a depreciation and amortization expense of $582 million, which combined is an annual run rate of roughly $4.5 billion, greater than its expected EBITDA for the year.

Is Carnival stock a buy?

Carnival stock is trading lower than it's been since the 1990s, one sign that the stock has plenty of upside potential if the business can deliver steady profit growth. 

The debt burden and recent share dilution (shares outstanding have nearly doubled since the start of the pandemic) will hamper its recovery, but if the underlying business has turned the corner, then that's a clear bullish signal going forward.

There's still plenty that could derail Carnival's recovery, including an economic crash or a resurgence in COVID-19 cases in some parts of the world. But the travel recovery clearly hasn't left Carnival or the rest of the cruise industry behind. It was just late to arrive.

Keep your eye on free cash flow going forward. If that figure is moving in the right direction, the stock should keep climbing in response.