The Cineworld share price surged on earnings. Should I buy now?

The Cineworld share price surged this week following its latest earnings report, but is now the time to buy? Zaven Boyrazian investigates.

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The Cineworld (LSE:CINE) share price surged this week following its interim earnings report. The FTSE 250 stock has had a pretty rough time after the pandemic forced the closure of all of its cinemas. But thanks to the relatively rapid rollout of Covid-19 vaccines, movie theatres are once again open for business. And with the latest rise in the Cineworld share price, the stock is up by just over 20% in the last 12 months. So, should I be adding Cineworld to my portfolio? Let’s take a look.

The rising Cineworld share price

At first glance, the firm’s performance doesn’t look too promising. After all, worldwide revenue from the box office and from confectionery retail dropped off a cliff compared to a year ago. However, this poor performance was not exactly unexpected. The comparison captures the first quarter of 2020, during which lockdown restrictions had yet to take effect. And therefore it’s not a meaningful comparison in my mind.

While revenue may be suffering, profitability has improved drastically. The reported operating loss for the last six-month period came in at around $209m versus $1.34bn in 2020. This reduction appears to be primarily caused by operational improvements as well as a substantial fall in cash burn. According to the management team, capital expenditure fell by 70%. Meanwhile, the cash burn rate was successfully brought down to $45m per month. That’s even more than the originally anticipated $60m burn rate.

Beyond operational improvements, Cineworld has also acquired further liquidity through additional loans, and the US CARES Act refund. Overall, the business seems to be in a substantially stronger financial position than a few months ago. So, seeing the Cineworld share price jump on the news is hardly surprising to me.

A long road lies ahead

As encouraging as this latest report is, Cineworld is far from returning to its pre-pandemic self. Debt has become a significant problem for this business over the years, even before the pandemic began. As a consequence, the interest bills have been racking up.

Cineworld had to cough up $111.2m in debt interest in the last six months, despite negotiating payment delays. And with no profits or positive cash flow to draw on, the company had to use up its cash reserves. As it stands, Cineworld has around $436.5m of cash on the balance sheet. That should be sufficient to keep it going for a short while. But over the long term, this isn’t sustainable. And the Cineworld share price may start to suffer for it.

Suppose positive cash flow doesn’t start flowing strongly again as cinemas return to pre-pandemic levels of operations? In that case, the business will likely have to raise additional capital. And with debt levels being so high, securing new loans may prove challenging, as would convincing investors to buy new equity if it were issued.

The Cineworld share price has its risks

The bottom line

All things considered, I’m far more optimistic about the future potential of the Cineworld share price today than a few months ago. And the latest successful release of the new Fast & Furious film has undoubtedly accelerated the return of moviegoers.

Having said that, the state of Cineworld finances is still too poor, in my opinion. Until the management team can bring debt levels down to more manageable levels, I’m keeping this business on my watchlist.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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