Is Norwegian Cruise Line’s 46% ROE Sustainable Amid High Debt?

In the world of finance, few metrics capture the imagination like Return on Equity (ROE). Norwegian Cruise Line Holdings Ltd. (NCLH) has delivered a staggering 46% ROE as of June 2025, calculated using trailing twelve months of data, with a net profit of $719 million and shareholders’ equity of $1.6 billion [1]. On the surface, this appears to be a triumph of capital efficiency. But beneath this impressive figure lies a precarious balancing act: a debt-to-equity ratio of 8.77 and total debt of $13.8 billion, which raises critical questions about sustainability.

The company’s financial strategy hinges on leveraging debt to amplify returns, a classic leveraged buyout playbook. Yet, as data from Yahoo Finance and NCLH’s own earnings reports indicate, this approach comes with material risks [1]. The cruise industry’s cyclical nature, coupled with NCLH’s heavy reliance on euro-denominated debt—€1.3 billion for newbuilds and an additional €570 million in Q3—exposes it to foreign exchange volatility. In Q2 2025 alone, non-cash losses from mark-to-market adjustments on this debt amounted to $121.9 million [3]. Such swings could erode profitability during periods of economic stress.

The interest coverage ratio, a key indicator of debt sustainability, tells a mixed story. While NCLH reported a ratio of 1.79 in Q2 2025 [2], another source cites 2.2 [3]. Either way, the metric remains perilously close to the threshold of financial distress (typically below 1.5 is cause for alarm). This tension between high returns and fragile coverage is compounded by a GuruFocus Financial Strength Rank of 3, signaling poor balance sheet health and a heightened risk of distress [2].

Yet, there are signs of progress. NCLH’s Net Leverage ratio improved to 5.3x in Q2 2025 from 5.7x in Q1, aligning with its 2026 target of mid-4x leverage [1]. Credit ratings agencies have taken notice: S&P Global upgraded NCLH’s issuer rating to B+ in March 2025, reflecting stronger cash flow visibility and a refinanced debt structure that eliminated its highest-cost obligations [4]. The company’s probability of default has also declined sharply, from 1.607 in July 2022 to 0.14% as of August 2025 [2].

The question remains: Can NCLH maintain its 46% ROE while deleveraging? The answer depends on two factors. First, the durability of its pricing power and occupancy rates. In Q2 2025, the company reported record revenue of $2.5 billion and Adjusted EBITDA of $694 million, driven by strong demand and capacity expansion [1]. Second, its ability to manage debt costs. With $13.8 billion in liabilities, even modest interest rate hikes or currency fluctuations could strain cash flows.

For investors, the trade-off is clear. NCLH’s high ROE is a product of aggressive leverage, which magnifies both gains and losses. While the company’s operational recovery and credit upgrades are encouraging, its Altman Z-Score of 0.32—a metric that places it in the “distress zone”—reminds us that the margin for error remains narrow [2].

In the end, NCLH’s story is one of extremes: a business that can generate exceptional returns but at the cost of significant financial risk. For those willing to tolerate volatility, the rewards could be substantial. For others, the path to sustainable growth may require more prudent capital structuring. As the cruise industry navigates an uncertain macroeconomic landscape, NCLH’s ability to walk this tightrope will define its long-term prospects.

Source:
[1] Norwegian Cruise Line Holdings Reports Second Quarter 2025 [https://www.nclhltd.com/investors/news-events/press-releases/detail/722/norwegian-cruise-line-holdings-reports-second-quarter-2025]
[2] NCLH (Norwegian Cruise Line Holdings) Financial Strength [https://www.gurufocus.com/term/rank_balancesheet/NCLH]
[3] Norwegian Cruise Line Holdings Balance Sheet Health [https://simplywall.st/stocks/us/consumer-services/nyse-nclh/norwegian-cruise-line-holdings/health]
[4] S&P upgrades NCLH, refinancing eliminates highest cost debt [https://www.seatrade-cruise.com/finance-legal-regulatory/s-p-upgrades-nclh-refinancing-eliminates-highest-cost-debt]