At 26p, is the Cineworld share price finally a bargain?

Although the company is not without its troubles, do improving financial results indicate a recovery for the Cineworld share price?

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Key Points

  • The company has a lower trailing P/E ratio than two major competitors
  • For 2021, losses narrowed from $3bn to $708m
  • There is an exciting slate of films scheduled for release in 2022, including Avatar 2

Cineworld (LSE:CINE) has endured a torrid time over the pandemic. For many long months, cinemas across the world were closed owing to government restrictions. Unsurprisingly, the Cineworld share price plummeted from 180p to a low of 25p. 

I bought shares in the company at low levels during the pandemic with a view to holding for the long term. Should I be thinking about adding to my holding at these low levels? Let’s take a closer look.

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Is the Cineworld share price cheap?

By looking at price-to-earnings (P/E) ratios, I can better understand if a share price is cheap or expensive. This ratio is found by dividing the share price by earnings.

Cineworld has a trailing P/E ratio of 6.07. When taken in isolation, this number doesn’t tell me all that much. By comparing it with the P/E ratios of competitors, however, it may reveal if the current Cineworld share price is a bargain. 

Cineplex, a Canadian cinema firm, has a trailing P/E ratio of 40.73, while US-based AMC Entertainment registers around 65.

This may suggest that I would be buying an undervalued company if I bought more shares soon. It’s also worth noting, however, that a very low P/E ratio may imply that the business is a riskier investment. 

Improving financial results

The company published its 2021 results in March and I was hoping to see improvements in revenue and admissions.

The results revealed narrowing losses. In 2020, losses stood at $3bn. By 2021, these had shrunk to just $708m. This is encouraging.

What’s more, revenue more than doubled from $850m to $1.8bn. Admissions are also slowly increasing again. Between 2020 and 2021, this figure climbed from 54.4m to 95.3m. 

It’s also important to note that the 2021 results included four months when cinemas were completely shut.    

With an exciting film slate, including Thor: Love and ThunderAvatar 2, and Jurassic World: Dominion, I think results may only get better over this year.

Some risks

There are risks associated with buying shares in Cineworld, however. Net debt increased from $4.3bn to $4.8bn between 2020 and 2021. Given this figure was already high, additional debt is concerning.

There’s also the ongoing legal dispute with Canadian rival Cineplex over Cineworld’s withdrawal from a takeover agreement. 

A court in Toronto recently awarded Cineplex C$1.2bn in damages, but Cineworld is appealing this judgement.

Today, the firm also “obtained undertakings to waive from its holders of its convertible bonds due 2025”. This related to an agreement to pay disgruntled Regal shareholders an extra $170m after a 2017 takeover.

The potential delay of payments may provide Cineworld with much needed liquidity in the coming months.

Overall, there are strong arguments for and against me buying more shares in Cineworld. I think the company may ultimately pull through the difficulties caused by the pandemic, but it’s possible that the Cineworld share price may dip further in the short term. While I won’t be buying more shares just now, I won’t rule out a purchase at a future date.

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Andrew Woods owns shares in Cineworld. 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.

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.

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