Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-01-27) + Yahoo Finance
Auditor: Deloitte & Touche LLP — Clean opinion (unqualified)
One-line verdict: Carnival delivered a record-breaking FY2025 — $26.6B revenue, $4.5B operating income (up 25%), and the highest adjusted ROIC in 19 years. The company has made remarkable progress deleveraging from its pandemic-era debt mountain, completing a $19B refinancing plan in less than a year. But the balance sheet still carries $28B in debt against just $1.9B in cash (7% coverage), which triggers the critical C4 fail. Debt/EBITDA at 4.1x remains elevated. The M-Score of -2.68 is clean, cash flow quality is strong (CFFO/NI = 2.25), and FCF of $2.6B demonstrates real earnings power. The Altman Z-Score of 0.04 reflects the asset-heavy, debt-heavy cruise model rather than imminent distress.
| Metric | Result |
|---|---|
| Red Flags | **1** |
| Watch Items | **2** |
| Checks Completed | **17/18** (1 N/A) |
| Beneish M-Score | **-2.68** (below -2.22 — clean) |
| F-Score (Fraud Probability) | **0.35** (0.13% probability) |
| Altman Z-Score | **0.04** (distress zone — structural) |
| Auditor | Deloitte & Touche LLP — Unqualified opinion |
| Fiscal Year | 2025 (ended November 30, 2025) |
| Report Date | 2026-04-05 |
The Business: Record Year for Cruising
The 10-K describes Carnival as the world's largest leisure travel company, with a portfolio of nine cruise line brands. The MD&A opens with: "2025 was another strong year that exceeded expectations, setting new records across our business and achieving more milestones."
Key milestones from the filing:
Revenue breakdown from the income statement: Passenger ticket revenue of $17,419M and onboard/other revenue of $9,202M.
Profitability: Full Recovery and Beyond
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $12,169M | $21,593M | $25,021M | $26,621M | +6.4% YoY |
| Gross Profit | $412M | $7,276M | $9,383M | $10,674M | +13.8% |
| Gross Margin | 3.4% | 33.7% | 37.5% | **40.1%** | Strong improvement |
| Net Income | -$6,093M | -$74M | $1,916M | $2,760M | +44% |
| Net Margin | -50.1% | -0.3% | 7.7% | **10.4%** | Strong improvement |
| ROE | -86.3% | -1.1% | 20.7% | **22.5%** | Recovering |
The recovery trajectory is dramatic: from -$6.1B net loss in FY2022 to $2.76B profit in FY2025. Gross margin expanded from 3.4% to 40.1% as the fleet returned to full utilization. The filing highlights "selling and administrative expense" of $3,402M and "depreciation and amortization" of $2,699M.
Cash Flow: Strong Quality Backing Recovery
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Operating Cash Flow | -$1,670M | $4,281M | $5,923M | $6,218M |
| Net Income | -$6,093M | -$74M | $1,916M | $2,760M |
| **CFFO / Net Income** | **N/A** | **N/A** | **3.09** | **2.25** |
| CapEx | -$4,940M | -$3,284M | -$4,626M | -$3,611M |
| Free Cash Flow | -$6,610M | $997M | $1,297M | $2,607M |
Cash flow quality is excellent. CFFO of $6.2B at 2.25x net income reflects the depreciation-heavy nature of cruise ships. FCF of $2.6B is the strongest in the company's history. The filing notes progress on deleveraging: "In December 2025, we successfully completed our $19 billion refinancing plan in less than a year and reduced total debt."
Balance Sheet: Improving But Still Leveraged
The filing states total debt was reduced, but $28B remains outstanding against $1.9B cash. The company "made significant progress strengthening our balance sheet" in FY2025. Debt/EBITDA at 4.1x is elevated (watch item) but declining, and interest coverage at 3.3x is thin but serviceable.
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 9 days, change +1 day YoY. Stable |
| A2 | AR vs Revenue Growth | WATCH | AR growth 14.9% exceeds revenue growth 6.4% |
| A3 | Revenue vs CFFO | PASS | Revenue +6.4%, CFFO +5.0%. Cash follows revenue |
| B1 | Inventory vs COGS | PASS | Inventory -0.4% vs COGS +2.0%. Normal |
| B2 | CapEx vs Revenue | PASS | CapEx -21.9% vs revenue +6.4%. Normal |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 31.9%. Normal |
| B4 | Gross Margin | PASS | Gross margin 40.1%, +2.6pp. Improving |
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 2.25. Strong cash backing |
| C2 | Free Cash Flow | PASS | FCF $2.6B, FCF/NI = 0.94 |
| C3 | Accruals Ratio | PASS | Accruals ratio = -6.7%. Negative — excellent |
| C4 | Cash vs Debt | **FAIL** | Cash $1.9B covers only 7% of debt $28.0B |
| D1 | Goodwill + Intangibles | PASS | Goodwill+Intangibles $1.8B = 14% of equity |
| D2 | Leverage | WATCH | Debt/EBITDA = 4.1x (>4x). Elevated |
| D3 | Soft Asset Growth | PASS | Other assets +14.8% vs revenue +6.4%. Normal |
| D4 | Asset Impairment | N/A | No write-off data |
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill+Intangibles change +1% YoY. Normal |
| F1 | Beneish M-Score | PASS | M-Score = -2.68 (< -2.22). Clean |
Beneish M-Score Component Breakdown:
| Component | Value | What It Measures | Concern? |
|---|---|---|---|
| DSRI | 1.080 | Days Sales in Receivables | Slight increase |
| GMI | 0.935 | Gross Margin Index — margins expanded | Good |
| AQI | 0.998 | Asset Quality Index | Normal |
| SGI | 1.064 | Sales Growth Index — 6.4% growth | Normal |
| DEPI | 0.954 | Depreciation Index — accelerating | Normal |
| SGAI | 0.983 | SG&A Index — improving | Good |
| TATA | -0.067 | Total Accruals to Assets — negative | Excellent |
| LVGI | 0.938 | Leverage Index — deleveraging | Good |
Key Risks from the 10-K
1. Massive Debt Overhang
Despite the $19B refinancing and ongoing deleveraging, $28B in total debt remains. Interest expense consumes a significant portion of operating income. Any disruption to bookings — pandemic, recession, geopolitical event — would stress the ability to service this debt.
2. Fuel Price Volatility
The filing reports fuel cost of $1,808M in FY2025. Fuel prices are volatile and largely uncontrollable, directly impacting margins.
3. Regulatory and Environmental Compliance
The filing describes extensive regulatory requirements: "Environmental, health, safety and labor requirements, and any changes thereto, could affect our operations and increase our costs." Cruise ships face evolving emissions standards globally.
4. Geopolitical and Health Event Risk
COVID-19 demonstrated the existential vulnerability of the cruise industry. The filing acknowledges ongoing risks from "pandemics, epidemics or other disease outbreaks" and "geopolitical conflicts and instability."
5. Customer Deposit Risk
Record customer deposits (up 7% YoY) are a positive sign for future revenue but also represent a liability — if bookings are cancelled en masse, refund obligations could strain liquidity.
Key Financial Trends (4-Year)
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Revenue | $12,169M | $21,593M | $25,021M | $26,621M |
| Net Income | -$6,093M | -$74M | $1,916M | $2,760M |
| Gross Margin | 3.4% | 33.7% | 37.5% | 40.1% |
| Net Margin | -50.1% | -0.3% | 7.7% | 10.4% |
| ROE | -86.3% | -1.1% | 20.7% | 22.5% |
| CFFO | -$1,670M | $4,281M | $5,923M | $6,218M |
| FCF | -$6,610M | $997M | $1,297M | $2,607M |
| Cash | $4,029M | $2,415M | $1,210M | $1,928M |
| Total Debt | $35,881M | $31,891M | $28,876M | $27,993M |
Summary
Grade: F. One red flag (cash vs debt) and two watch items (AR growth, leverage).
Carnival's operational recovery is extraordinary. Record revenue of $26.6B, record operating income of $4.5B, record FCF of $2.6B, and the highest ROIC in 19 years. The M-Score of -2.68 confirms no manipulation, and the accruals ratio of -6.7% shows earnings are cash-backed. Gross margins expanded from 3.4% post-pandemic to 40.1%.
The F grade reflects the legacy of pandemic-era survival borrowing. Total debt of $28B against $1.9B cash (7% coverage) is the sole red flag. This is down from $35.9B in FY2022, showing the deleveraging trajectory is real. Debt/EBITDA at 4.1x and interest coverage at 3.3x are improving but still tight. The Altman Z-Score of 0.04 reflects the capital-intensive nature of cruise operations, not imminent bankruptcy risk.
The critical risk is another black swan event — pandemic, recession, or geopolitical crisis — that could interrupt the cash flows needed to service $28B in obligations. The company is heading in the right direction, but the balance sheet still carries scars.
**Disclaimer**: This report is based on Carnival Corporation's fiscal year 2025 10-K filed with the SEC on January 27, 2026. This is NOT investment advice.
**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade F means major red flags were detected — in this case, the post-pandemic debt load triggers critical checks.