Carnival (CCL -0.66%) is benefiting from renewed investor optimism. The cruise line's shares have soared almost 40% this year, despite falling 37% in the last three months. This performance is thanks to the business posting strong financials. Q3 revenue of $6.9 billion was a record, and Carnival is now back to posting positive net income. 

Investors who missed out on the consumer discretionary stock's rally in 2023 might be compelled to buy shares. They trade at a price-to-earnings ratio of just 5.8, which is less than a third the average multiple over the past 10 years. 

But even though that valuation looks incredibly attractive, I think it's a good idea to avoid Carnival stock. Here are two important reasons why that's a smart move. 

Poor financial condition 

In the latest quarter (Q3 2023 ended Aug. 31), Carnival posted GAAP net income of nearly $1.1 billion, the first three-month period that the business has been in the black since the fourth quarter of fiscal 2019. That's certainly an encouraging development for some investors that this company is starting to show signs of improvement as it recovers from the financial impacts of the coronavirus pandemic. 

But don't let that fool you. This is still a business that is in a difficult financial situation. There's no denying this reality. 

As of Aug. 31, Carnival carried a monster debt balance of $31 billion on its balance sheet. To provide some context about how huge this figure is, the company's market cap currently sits at $14.5 billion. This isn't the sign of a financially sound enterprise. 

To be fair, Carnival was forced to raise a lot of capital to weather the storm that was the pandemic, when the company's operations came to a screeching halt. But things appear to be normalizing now as far as consumer demand is concerned. The company's debt burden stood at about $10 billion before the health crisis, though, so Carnival has a lot of work to do to get things back toward that level. 

It's also not a surprise that Carnival is a very capital-intensive business. Buying new ships, as well as renovating existing ones, is extremely expensive. In fact, the business is expected to spend $3.4 billion in capital expenditures this fiscal year, before spending $4.1 billion in fiscal 2024. This is just the name of the game for a company that deals with these large physical items.  

Consequently, Carnival is far from a capital-light business, which is what legendary investor Warren Buffett says does better in an inflationary environment. 

"The best business to own is one that doesn't require continuous reinvestment because it becomes more and more expensive as the value of a dollar drops," he said during Berkshire Hathaway's 2015 annual meeting. He continued: "Any business with heavy capital investment tends to be a poor business to be in in inflation and often it's a poor business to be in generally." 

As the current inflation rate remains well above the Federal Reserve's 2% target, perhaps the Oracle of Omaha's words wave a huge red flag for investors interested in owning Carnival stock. 

Recessionary fears 

Speaking more to macro factors, another important reason that it's a smart idea to stay away from this business is the possibility of a recession on the horizon. Yes, the economic backdrop has remained resilient, and it seems like more economists are predicting that a soft landing will happen. 

But there are some cracks that are starting to show as it relates to the economic picture. Credit card debt in the U.S. hit a new record in the second quarter, now at more than $1 trillion. And the personal savings rate has dipped below levels not seen since before the pandemic, likely a direct result of Americans having to stretch their finances due to inflation. 

At a time when personal finances are starting to feel the pinch, a discretionary purchase like taking a cruise might be the furthest thing on the list of priorities for many people. If the economic backdrop worsens, Carnival's strong momentum could take a serious hit. Therefore, investors might want to avoid a stock like this that's so dependent on the macro environment.