Royal Caribbean Cruises (RCL) FY2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-11, FY ended December 31, 2025) + Yahoo Finance

Auditor: PricewaterhouseCoopers LLP — Unqualified opinion (PCAOB ID No. 238)

One-line verdict: Royal Caribbean's earnings quality is undermined by a structural cash trap: the company generated $4.3B in net income but only $1.2B in free cash flow because $5.2B in capital expenditures — driven by new ship deliveries including Star of the Seas and Celebrity Xcel — consumed nearly all operating cash. With $22.0B in total debt against just $825M in cash, this is a company that must keep growing to service its obligations. The 10-K discloses customer deposits of $5.7B — essentially interest-free borrowing from future guests — which flatters operating cash flow but masks the capital intensity of the business.

The Cruise Business Model: Revenue is Booming, But Capital Devours Cash

Royal Caribbean operates three global cruise brands — Royal Caribbean, Celebrity Cruises, and Silversea — with a combined fleet of 69 ships and approximately 179,720 berths as of December 31, 2025. Per the filing, "Passenger ticket revenues accounted for approximately 70% of total revenues in 2025, 2024 and 2023," with onboard activities generating the remainder.

The growth trajectory is striking:

The filing states the company achieved "Adjusted EBITDA of $7.0 billion, Operating Income of $4.9 billion, and ROIC of 18.0%." Operating income margin expanded from 20.7% in FY2023 to 24.9% in FY2024 to 27.4% in FY2025. The top-line and margin story is genuinely impressive.

But revenue quality and earnings quality are different questions.

Cash Flow: Where the Story Falls Apart

FCF/NI of 0.29 means that for every dollar of reported net income, only 29 cents converted to free cash. This ratio has been below 50% for two of the past three years, triggering the C2 red flag.

The 10-K explains the CapEx surge: "capital expenditures associated with taking delivery of Star of the Seas and Celebrity Xcel and the acquisition of the Port of Costa Maya in 2025 compared to the delivery of Utopia of the Seas and Silversea Nova in 2024." As of December 31, 2025, Royal Caribbean had four additional ships on order — three Icon-class and one Oasis-class — expected between 2026 and 2028, plus two Discovery-class ships expected in 2029 and 2032. This CapEx pressure is not going away.

The high CFFO/NI ratio (1.51) looks healthy but is structurally inflated by $5.7B in customer deposits — prepayments from future guests that show up as operating cash inflow. These deposits increased $243M year-over-year. Without customer deposits, operating cash flow would be significantly lower.

The Debt Problem: $22B and Growing

Per the filing, total debt was $21.9B at year-end, with $3.2B in current maturities due within 12 months. "Long-term debt obligations mature at various dates through fiscal year 2042 and bear interest at fixed and variable rates." The company had approximately $1.6B of variable-rate indebtedness. The 10-K warns: "an increase in market interest rates would increase our interest expense and our debt service obligations" and "a hypothetical 1% increase in prevailing interest rates would increase our forecasted 2026 interest expense by approximately $12.3 million."

Cash of $825M covers only 4% of total debt — the worst ratio among the checks. However, Debt/EBITDA at 3.1x is manageable, and interest coverage at 4.9x provides adequate margin. The Z-Score of 0.11 lands firmly in the distress zone, but the Altman Z-Score was designed for manufacturing firms and systematically penalizes asset-heavy businesses like cruise lines. This is a structural limitation, not necessarily a distress signal.

The company achieved investment-grade ratings across all three major credit rating agencies during FY2025, "maintained an unsecured balance sheet, managed debt maturities, and returned $2.0 billion in capital to shareholders through dividends and share repurchases."

The 18-Point Screening

Revenue Quality

Revenue quality is clean. DSO of 6 days is extremely low because cruise customers prepay — the real "receivable" is the $5.7B customer deposit liability, not accounts receivable. AR actually declined 14.6% while revenue grew 8.8%, indicating tighter collections.

Expense Quality

Per the filing, "Total cruise operating expenses" as a percentage of revenue decreased from 55.9% (2023) to 52.5% (2024) to 50.6% (2025), and "Marketing, selling and administrative expenses" fell from 12.9% to 12.4%. The company is generating operating leverage as capacity grows faster than overhead. "Depreciation of ships is generally computed net of a 10%-15% projected residual value, using the straight-line method over the estimated useful life of the asset," which is 30 years for ships.

Cash Flow Quality

C2 and C4 are the two red flags. The FCF shortfall is structural — cruise lines must continuously invest in new ships to remain competitive. The cash-to-debt ratio is alarming on the surface but must be evaluated alongside the business model: customer deposits ($5.7B) effectively function as a permanent, interest-free financing source.

Balance Sheet

Per the balance sheet, property and equipment (net) rose from $31.8B to $35.7B — these are the ships. Total shareholders' equity improved from $7.7B to $10.2B ($10.0B attributable to RCL), driven by retained earnings. Goodwill at $808M is minimal for a company this size.

Acquisition Risk

The acquisition of the Port of Costa Maya is noted in the filing but is a small add-on to the private destinations portfolio, not a large M&A bet.

Manipulation Score

All M-Score components are benign. DSRI of 0.785 confirms AR is shrinking relative to revenue. No manipulation signals.

Key Risks from the 10-K

1. Newbuild Commitments Lock In Future CapEx

The filing discloses four ships on order with deliveries from 2026 to 2028, plus a memorandum of understanding for two Discovery-class ships for 2029 and 2032. Per the 10-K: "To fund our capital expenditures (including new ship orders), operations and scheduled debt payments, we have historically relied on a combination of cash flows provided by operations, drawdowns under available credit facilities, issuances of debt and equity securities, and ship export credit facilities." Future CapEx is contractually committed, not discretionary.

2. Disease and Geopolitical Risk Concentration

The filing warns: "Disease outbreaks and increased concern related to illness when traveling to, from, and on our ships, could cause a decrease in demand for cruises, guest cancellations, travel restrictions." The company explicitly references "consumer perception that cruises are more susceptible than other vacation alternatives to the spread of infectious diseases." The COVID experience — which drove a $2.2B loss in FY2022 — is recent history.

3. Liberia Incorporation and Tax Arrangements

Royal Caribbean is incorporated in the Republic of Liberia and "relies on tax treaties to provide an exemption from or reduction in taxation" in various jurisdictions. The filing warns this could change: "To the extent tax treaties are changed or interpreted in ways that are not in our favor, or do not apply to us or are eliminated, we could be subject to additional income or other taxes."

4. Fuel Cost Exposure

Per the risk factors, operating costs "including fuel, food, payroll and benefits, airfare, taxes, insurance, and security costs, can be and have been subject to increases due to market forces and economic or geopolitical conditions or other factors beyond our control."

Summary

Grade: F. Two structural red flags, but context matters.

Royal Caribbean's two red flags — FCF consistently below 50% of net income, and cash covering only 4% of total debt — are genuine concerns but are partly structural features of the cruise business model. Ships cost billions, last 30 years, and generate revenue every day of their operating life. Customer deposits of $5.7B provide permanent interest-free financing. Investment-grade ratings were achieved in FY2025.

The real risk is cyclical: this highly leveraged model works beautifully when occupancy is 109.7% and margins are expanding, but it was existentially threatening during COVID when revenue went to near-zero while debt service continued. The Z-Score of 0.11 reflects this structural fragility. For a business that generated $4.9B in operating income and 18.0% ROIC, the books are clean — but the business model carries inherent leverage risk that the screening framework correctly penalizes.

**Disclaimer**: This report is based on Royal Caribbean's FY2025 10-K filed with SEC EDGAR on February 11, 2026. This is NOT investment advice.

Data: SEC EDGAR 10-K + Yahoo Finance

Auditor: PricewaterhouseCoopers LLP (Unqualified opinion)

Fiscal year ended: December 31, 2025