Solvency and cover: can they carry their debt?
Carnival borrowed heavily to survive 2020–22 and says it has now passed an investment-grade leverage threshold. Measure leverage and interest cover over three years and judge how far the recovery has gone.
FinanceReading the accounts like an analystAbout 8 min: 8 readingUpdated
General education, not financial advice.
- Calculate leverage (debt to EBITDA, debt to capital) and cover (EBIT and EBITDA to interest) and read their trend
- Explain what covenants and debt maturities add to the ratios
- Judge solvency with one-off charges and the business cycle in mind
Builds toward: Judge a company. Read a company's accounts, apply Graham's tests, and make a rough valuation.
Reading the accounts like an analyst: lesson 12 of 14
- Reading the accounts like an analyst
- The three statements and how they link 10 min
- Common-size statements and trends 9 min
- Profitability ratios: margins, ROA and ROE 9 min
- Efficiency ratios and the cash conversion cycle 9 min
- DuPont analysis: where ROE comes from 10 min
- Reading the cash flow statement like an analyst 9 min
- Profit against cash: accruals and earnings quality 11 min
- When is a sale a sale? Revenue timing and channel stuffing 10 min
- The expense side: capitalised costs, reserves and big baths 8 min
- The Beneish M-score: a screen for manipulation, and its limits 10 min
- Liquidity: can they pay what's due this year? 9 min
- Solvency and cover: can they carry their debt? 8 min
- Leases and hidden debt 8 min
- Writing a credit view 9 min
Pairs with any financial statement analysis text (the chapter on credit analysis: capital structure and solvency)
Mission
This is an exercise in analysis on a real filing, not a recommendation to buy, sell or lend.
From: the head of credit research at a bond fund Due: Monday's credit committee, half a page
Carnival's annual report says it has "surpassed our investment grade leverage metric threshold" and reinstated its dividend. Before we discuss its bonds, I want our own view: how much debt does it carry against what it earns, how well does it cover its interest, how much has that changed since 2023, and what could undo it? Use the 10-K for the year to 30 November 2025 (filed 27 January 2026).
The documents (Carnival Corporation & plc, Form 10-K for the year to 30 November 2025; millions of dollars):
| 2023 | 2024 | 2025 | |
|---|---|---|---|
| Revenues | 21,593 | 25,021 | 26,622 |
| Operating income | 1,956 | 3,574 | 4,483 |
| Depreciation and amortisation | 2,370 | 2,557 | 2,790 |
| Interest expense, net of capitalised interest | 2,066 | 1,755 | 1,349 |
| Net income (loss) | (74) | 1,916 | 2,760 |
| Operating cash flow | 4,281 | 5,923 | 6,218 |
| Capital expenditures | 3,284 | 4,626 | 3,611 |
| Balance sheet, 30 November | 2024 | 2025 |
|---|---|---|
| Current portion of long-term debt | 1,538 | 2,603 |
| Long-term debt | 25,936 | 24,037 |
| Operating lease liabilities | 1,402 | 1,353 |
| Customer deposits (current) | 6,425 | 6,831 |
| Shareholders' equity | 9,251 | 12,284 |
From the MD&A: liquidity of 6.4 billion dollars (1.9 billion of cash and 4.5 billion available under a revolving credit facility), plus 7.8 billion of undrawn export credit facilities for future ship deliveries; total debt reduced by over 10 billion since its peak in January 2023; a 19 billion dollar refinancing plan completed in December 2025.
What it is
The toolkit for this job.
Leverage: how much debt against what the business earns or owns.
- Debt ÷ EBITDA: how many years of earnings before interest, tax, depreciation and amortisation the debt represents. EBITDA = operating income + depreciation and amortisation.
- Net debt ÷ EBITDA, using debt less cash.
- Debt ÷ capital = debt ÷ (debt + equity).
Cover: how easily earnings pay the interest.
- Interest cover (EBIT) = operating income ÷ interest expense.
- EBITDA cover = EBITDA ÷ interest: more generous, because depreciation is added back, even though ships and planes do need replacing.
- Fixed-charge cover adds lease payments to both sides; it matters most for companies that lease heavily (the next lesson).
Beyond the ratios.
- Maturities: how much falls due in each of the next few years, and whether it can be refinanced.
- Covenants: limits in loan agreements (for example, a maximum debt-to-EBITDA ratio) whose breach lets lenders demand repayment.
- The cycle: ratios in a good year say little about a bad one. Ask what a fall in earnings would do.
Before you start
List your first three checks on Carnival's figures, and what result from each would change your view. Then compare them with the expert's.
Why it matters
Solvency decides whether a company survives a bad patch, and at what cost. Lenders price debt, and rating agencies grade it, largely on leverage and cover. A company that looks safe at the top of its cycle can be in breach of covenants in a downturn. An analyst's job is to measure today's position and then test it against what could go wrong.
Worked example
An imaginary hotel group, Larchmont (millions): operating income 300, depreciation 200, interest 100, debt 2,000, cash 200, equity 1,000.
- EBITDA = 300 + 200 = 500; debt ÷ EBITDA = 4.0×; net debt ÷ EBITDA = 1,800 ÷ 500 = 3.6×.
- Interest cover = 300 ÷ 100 = 3.0×; EBITDA cover = 5.0×.
- Debt ÷ capital = 2,000 ÷ 3,000 = 67%.
- If operating income fell by a third (to 200), cover would drop to 2.0× and debt ÷ EBITDA rise to 5.0×: a recession test in two lines.
Common mistake
Reading one year's ratio without its trend or its stress test. A debt-to-EBITDA ratio is only as good as the EBITDA in it: a record year makes leverage look low just when it's most likely to rise.
Key terms
- EBITDA
- operating income plus depreciation and amortisation
- debt ÷ EBITDA
- a leverage ratio: years of EBITDA needed to equal the debt
- interest cover
- operating income (EBIT) ÷ interest expense
- debt ÷ capital
- debt ÷ (debt + equity)
- covenant
- a condition in a loan agreement, such as a maximum leverage ratio
- maturity profile
- how much debt falls due in each future year
Practise the key terms
Tap a card to turn it over. 6 cards.
| Front | Back |
|---|---|
| EBITDA | operating income plus depreciation and amortisation |
| debt ÷ EBITDA | a leverage ratio: years of EBITDA needed to equal the debt |
| interest cover | operating income (EBIT) ÷ interest expense |
| debt ÷ capital | debt ÷ (debt + equity) |
| covenant | a condition in a loan agreement, such as a maximum leverage ratio |
| maturity profile | how much debt falls due in each future year |
Task
Write the half-page note for the credit committee:
- debt ÷ EBITDA, net debt ÷ EBITDA, debt ÷ capital and both cover ratios for 2024 and 2025, and cover for 2023;
- how much of the improvement comes from earnings and how much from less debt;
- a simple stress test: what a 25% fall in operating income would do to leverage and cover;
- your view, and what would change it.
Model answer
Show the model answer
| 2023 | 2024 | 2025 | |
|---|---|---|---|
| Total debt | 27,474 | 26,640 | |
| EBITDA | 4,326 | 6,131 | 7,273 |
| Debt ÷ EBITDA | 4.5× | 3.7× | |
| Net debt ÷ EBITDA | 4.3× | 3.4× | |
| Debt ÷ capital | 75% | 68% | |
| Interest cover (EBIT) | 0.9× | 2.0× | 3.3× |
| EBITDA cover | 2.1× | 3.5× | 5.4× |
Workings, 2025: debt 2,603 + 24,037 = 26,640; EBITDA 4,483 + 2,790 = 7,273; net debt 26,640 − 1,928 = 24,712; debt ÷ capital 26,640 ÷ (26,640 + 12,284). 2024 net debt uses cash of 1,210.
Stress test (operating income −25%, depreciation unchanged): operating income 3,362, EBITDA 6,152, debt ÷ EBITDA 4.3×, interest cover 2.5×.
Carnival: a real recovery, mostly from earnings; still a leveraged company · Source: Form 10-K, year to 30 November 2025
Interest cover has gone from below 1× in 2023 to 3.3× in 2025, and debt ÷ EBITDA from 4.5× to 3.7× in a year. Most of the improvement is earnings: EBITDA rose 19% while debt fell only 3%. At 2024's debt, 2025's EBITDA alone would give 3.8× (27,474 ÷ 7,273), so higher earnings account for about 0.7 of the 0.8 fall. Lower interest helped too, as debt was repaid and refinanced. Free cash flow of about 2.6 billion (6,218 − 3,611) gives room to keep repaying.
What the ratios don't settle. Debt is still about two-thirds of capital and 3.7 times EBITDA. 2.6 billion falls due within a year, so refinancing matters, though 6.4 billion of liquidity covers it. The 6.8 billion of customer deposits is cash received in advance for future cruises: helpful while bookings are strong, but it would shrink in a downturn just as earnings fell. "Investment grade leverage metric threshold" is the company's own description; a rating is the agencies' decision.
Stress test. A 25% fall in operating income takes leverage back to about 4.3× and cover to 2.5×: roughly where it was in 2024.
What would change my view: earnings falling as bookings or prices weaken; debt rising again with new ship orders (7.8 billion of export credit is ready to fund them); or dividends and buybacks taking priority over repayment.
How the expert gets there. Their first three checks: (1) leverage and cover over three years, not one; (2) how much of the change is earnings and how much is debt; (3) what a bad year would do. Then they read the liquidity and maturity notes, and keep the company's own claims separate from their own measures.
What a reviewer would flag:
- Using long-term debt without the current portion.
- Quoting EBITDA cover alone: ships must be replaced, so depreciation is a real cost.
- Treating customer deposits as a permanent source of funds.
- No stress test.
Practice
Transfer: a food company. Kraft Heinz reported an operating loss of 4.7 billion dollars for 2025 (Form 10-K for the year to 27 December 2025, filed 12 February 2026), against interest expense of 947 million and total debt of 21.2 billion. A screen shows "negative interest cover". Read the income statement and its notes. In three sentences: is Kraft Heinz unable to cover its interest, and what would change your mind?
A model answer
No: the loss comes from non-cash impairments, and the operations still cover interest about five times. Selling, general and administrative expenses include 6.7 billion of goodwill impairment and 2.6 billion of intangible-asset impairment; without them operating income was about 4.6 billion (−4,669 + 9,306), cover about 4.9× and debt about 3.8× EBITDA (21,219 ÷ (4,637 + 968)), and operating cash flow rose to 4.5 billion. But the impairments still matter to a lender: they mean the businesses are now expected to earn less than was paid for them, and the MD&A also reports that, apart from the impairments, operating income fell 715 million, citing inflation in commodity and manufacturing costs, unfavourable volume and mix, and other factors. What would change my mind: further impairments with falling operating cash flow, or leverage rising as underlying earnings decline.
How the expert gets there: when a ratio turns negative, they find the line that did it and ask whether it was cash.
What a reviewer would flag: treating the screen's negative cover as a default signal; or dismissing impairments as meaningless.
In short
- Leverage: debt ÷ EBITDA, net debt ÷ EBITDA, debt ÷ capital.
- Cover: EBIT ÷ interest (stricter) and EBITDA ÷ interest.
- Always use total debt, including the current portion.
- Separate earnings recovery from debt reduction, and stress-test the result.
- Maturities, covenants and liquidity complete the picture.
Check yourself
Answer in your head first, then open the answer. Nothing is saved.
Operating income 600, depreciation 150, interest 200, debt 3,000. What are interest cover and debt ÷ EBITDA?
Show answer
3.0× and 4.0×.
Why is EBITDA cover more generous than EBIT cover?
Show answer
It adds back depreciation and amortisation, treating them as if they needn't be spent, although equipment and ships must eventually be replaced.
A company's leverage fell from 5× to 4× in a record year. What would you check?
Show answer
Whether earnings or debt repayment drove it, and what leverage would be if earnings fell back to a normal or weak year.
Further reading
- Carnival Corporation & plc, Form 10-K for the year ended 30 November 2025; The Kraft Heinz Company, Form 10-K for 2025 (SEC EDGAR).
- Corporate Finance Institute, Financial Analysis Glossary (leverage and coverage ratios).
- On this site: Liquidity: can they pay what's due this year?.
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