2020 was a rough year for the Carnival (LSE:CCL) share price. After the pandemic put a pause on almost all travel, the firm’s revenue stream became jeopardised. And consequently, its stock price crashed by over 80% in a matter of weeks.

But now that the vaccine rollout is underway and borders are beginning to re-open, it has started climbing relatively quickly. Over the last 12 months, the Carnival share price has risen from 780p to around 1740p today. That’s an increase of nearly 120%! Should I be adding this stock to my portfolio? Let’s take a closer look.

The rising Carnival share price

The company released its Q1 business update earlier this week. And while it did report a significant $2bn loss due to Covid-19, I did spot some encouraging signs of a recovery. The cash burn rate decreased, improving firm liquidity. Six of Carnival’s nine brands are expected to set sail again this summer. And bookings volume surged by 90% compared to the previous quarter.

In fact, advanced bookings for 2022 are already exceeding pre-pandemic levels, despite cutbacks in the marketing budget. This indicates to me that there is an enormous demand from its customers to get back on the water. This is pretty understandable after a year in confinement. 

Needless to say, I think the report looked promising. And it seems investors agree as the Carnival share price increased shortly after publication.

There are still some risks to consider

Despite the impressive boost of customer bookings, it may take longer than expected to return to pre-pandemic operational levels. Why? Because while its ships are leaving the harbour this summer, they will do so at a reduced capacity to protect passenger safety.

It’s also worth remembering that Carnival operates on a global scale. The vaccine rollout is progressing rapidly in the UK. But there are still countries that are dealing with rising infection rates. In the US, cruise travel currently remains postponed with no precise date as to when that may change. 

But the most prominent risk I’ve spotted is its level of debt. With no reliable source of income, the company had to turn to equity and debt financing to remain afloat. Consequently, overall debt levels in 2020 increased from $11.5bn to $26.9bn. This led to interest payments rising to $907m – a 300% increase!

Combining this with its capital lease expenses of $1.7bn and comparing it to its pre-pandemic operating profits of $3.3bn shows that 79% of its income could be swallowed up. This ultimately restricts the firm’s ability to pay off its loans and reward shareholders with dividends. Both of which could negatively impact the Carnival share price.

The bottom line

It’s clear to me that Carnival continues to have a strong brand with strong customer loyalty. These are certainly desirable traits for a business to have, in my opinion. But personally, the increased leverage gives me pause. With reduced spare profits

And so, for now, Carnival will remain on my watchlist until I find more information about how it intends to deal with its now substantial level of debt.

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