With pandemic-era restrictions gone and revenue soaring back to 2019 levels, Carnival (CCL -4.62%) is likely on the radar of deal-hungry investors. That said, it would be wise to look before you leap. This company still has some massive challenges that could sap investor value. Let's discuss three reasons why the stock is best avoided. 

1. Recovery is harder than it looks

In 2019, Carnival had a bright future. That year, sales grew by 10% to $20.8 billion. And the company generated a whopping $3 billion in net income, which it used to pay a healthy quarterly dividend to its shareholders. It's no surprise that this period (the last year before the pandemic) remains an aspirational target for management. 

In Carnival's most recent earnings call, the year 2019 was mentioned 37 times. And CEO Josh Weinstein believes his company is getting closer to closing the gap, guiding for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $4 billion in 2023. This is around 27% lower than the $5.5 billion generated in 2019, and there are additional factors that make the comparison look even worse. 

Red arrow crashing into the ground.

Image source: Getty Images.

2. The company is saddled with debt and equity dilution 

Carnival's adjusted EBITDA calculation adds back important cash outflows like interest expenses. This is a major omission because it totaled just $206 million in 2019, compared to a whopping $1.6 billion in 2022. Carnival's total debt load has also ballooned from $9.7 billion to $32 billion over those three years, so the payoff of debt principal will be another massive drain on the company's cash flow. 

As a cruise operator, Carnival has a lot of fixed assets that need to be repaired and replaced, leading to substantial capital expenditures. Management expects this outflow to total $3.4 billion in 2023 before rising to $4.1 billion in 2024.

Between the massive interest expense and capital expenditures, it looks unlikely that the company will have much value left over for investors. Further, it might need to raise external capital such as more debt or the issuance of new shares, which reduces current investors' claims on future earnings. 

Equity dilution has already been a major problem for Carnival. The number of basic shares outstanding rose from 690 to 1,180 between 2019 and 2022, an increase of 70%. 

3. Carnival is not so cheap 

On the surface, Carnival's price-to-sales (P/S) multiple of 0.76 looks low compared to the S&P 500 average of 2.40. But buying a stock gives investors exposure to both the company's equity and debt, a concept measured by enterprise value, which is a metric that adds a company's net debt to its market cap. 

Currently, Carnival has an enterprise value of $43 billion, which is more than three times its market cap. And that looks like too much to pay for such a massively deteriorated business with limited profit potential.