It’s been a rough year for the share price of Cineworld (LSE:CINE). Despite gaining some upward momentum in early 2021, shares of the world’s second-largest cinema chain have since resumed their pandemic-triggered downward spiral.
In 2022 alone, the stock has almost lost half its value, and over the last 12 months, it’s down by 70%! With the shares now trading 90% lower than pre-pandemic levels, is there a risk of them going to zero?
Why the Cineworld share price has collapsed
Before the pandemic reared its ugly head, this stock was actually thriving. With the group expanding its network of cinemas worldwide, it became the second-largest chain just behind AMC Entertainment. So it’s no surprise that in the 10 years leading up to 2019, the Cineworld share price was up over 650%! Then Covid-19 came along and stopped it all.
There’s no denying that the group’s rapid expansion generated a lot of growth. The problem is how management did it. They used a lot of debt.
Debt can be a powerful tool when used correctly. And with near-zero interest rates since the financial crisis, its attractiveness as a source of financing only increased. But unlike equity, loans demand interest. So I can imagine the horror of being handed a $548m interest bill at the end of 2020 when revenue and profits evaporated due to lockdown restrictions.
With no meaningful income and the Cineworld share price already collapsed, how does the group pay this bill? The answer is more debt. Today the company has just over $5bn in loan obligations, $921.5m of which matures next year. Now slap on $3.5bn of lease liabilities that also incur interest, and lastly, a $940m bill for damages awarded to Cineplex for Cineworld pulling out of an acquisition deal in mid-2020.
The situation looks bleak, to say the least. Even more so now that interest rates are on the rise. And with a market capitalisation of only £250m ($295m), the risk of bankruptcy looks very real in my eyes.
A glimmer of hope?
As hopeless as the situation seems, there are some positives that provide some encouragement. In 2021, the revenue stream started to restore itself, landing at $1.8bn. That’s still only around 40% of pre-pandemic levels. But it’s more than double that of 2020. And subsequently, the group moved back into the black on an operating level.
Looking ahead, as of March this year, the firm has been enjoying the benefits of a full film slate. Pairing that with pent-up demand, analyst forecasts for 2022 seem far more optimistic. And these forecasts suggest it could potentially see the bottom line venture back into positive territory. If true, the risk of bankruptcy would fall sharply. And the trajectory of the Cineworld share price could reverse.
But until the interim results for 2022 come out in September, it’s impossible to judge the current financial health of this business. Based on the numbers we do have, Cineworld looks like it’s in a lot of trouble. And personally, that’s not something I’m keen to add to my portfolio.