Will Cineworld’s share price fall to zero?

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It has been a difficult year for the share price of cineworld (LSE: CINE). Despite some upward momentum at the start of 2021, shares of the world’s second-largest cinema chain have since resumed their pandemic-triggered downward spiral.

In 2022 alone, the stock has lost almost half of its value, and over the last 12 months, it has fallen by 70%! With stocks now trading 90% below pre-pandemic levels, is there a risk of them falling to zero?

Why Cineworld’s stock price crashed

Before the pandemic hit, this stock was actually thriving. As the group expands its network of cinemas around the world, it becomes the second chain just behind AMC Entertainment. It’s no surprise, then, that in the 10 years to 2019, Cineworld’s share price rose by more than 650%! Then the Covid-19 arrived and stopped everything.

It is undeniable that the rapid expansion of the group has 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 appeal as a funding source has only grown. But unlike equity, loans charge interest. So I can imagine the horror of receiving a $548 million interest bill at the end of 2020 when revenues and profits evaporated due to lockdown restrictions.

With no significant revenue and Cineworld’s share price has already crashed, how does the group pay that bill? The answer is more debt. Today, the company has just over $5 billion in loan obligations, of which $921.5 million matures next year. Now apply $3.5 billion in lease debt which is also earning interest, and finally a $940 million bill for damages awarded to Cineplex for Cineworld pulling out of an acquisition deal in mid-2020.

The situation looks grim, to say the least. Especially now that interest rates are on the rise. And with a market capitalization of just £250m ($295m), the risk of bankruptcy looks very real to me.

A glimmer of hope ?

As desperate as the situation seems, there are a few bright spots that provide encouragement. In 2021, the revenue stream began to recover, landing at $1.8 billion. This is still only around 40% of pre-pandemic levels. But it is more than double than in 2020. And subsequently, the group is back in the dark operationally.

Looking ahead, since March this year, the company has enjoyed the benefits of a comprehensive movie slate. Combining that with pent-up demand, analyst forecasts for 2022 look much more optimistic. And those forecasts suggest it could potentially see the bottom line return to positive territory. If this is true, the risk of bankruptcy would decrease sharply. And the trajectory of Cineworld’s share price could reverse.

But until the publication of interim results for 2022 in September, it is impossible to judge the current financial health of this company. From the numbers we have, Cineworld seems to be in big trouble. And personally, it’s not something I want to add to my portfolio.