Back in August, I wrote about Cineworld (LSE:CINE), following the company’s Chapter 11 bankruptcy filing in the US. The stock had sunk to record lows in a rapid fashion over the course of the year. Cineworld shares have doubled in the past month, but given the volatility over a longer period, here’s what my £1,000 would look like if I’d invested in 2021.
Not a good position
Exactly a year ago, the share price closed at 65.6p. It’s down almost 10% today, trading at 5.3p. This works out as a 92% loss over a one-year period. My theoretical £1,000 investment would currently be worth £80.
As far as a one-year performance goes, this is a bit of a disaster. However, it wasn’t obvious during the past year that this would be the fate. In Q1, full-year results showed that the loss for 2021 was much smaller than the pandemic-hit 2020. Big screen blockbusters returned, including Top Gun: Maverick this summer. The boost of revenue here could have sparked something for the company.
However, these positives were more than outweighed by negative developments. The August bankruptcy filing provided a huge short-term hit to the stock, from which it has never been able to recover. Half-year results in September again showed losses getting smaller. Yet it was clear that spiraling debt and cash flow could potentially cause the business to go bust.
As an investor, the value of a business that goes bust is £0. The fall in the share price to close to zero is therefore a fair depiction of the fundamental state of Cineworld.
Short-term pop for Cineworld shares
My investment would have increased slightly in value in recent weeks thanks to some good news. Cineworld reached a settlement in court with some creditors. This not only means that it will honour some debt repayment and some rental payments, but it allows the company to borrow more money.
This is a positive in the short run but doesn’t really change the fact that the company has a long difficult road ahead. With net debt at $8.9bn as of the end of last year, I’d want to see a genuine plan on how this can be reduced in coming years before contemplating investing.
The doubling of the share price in the past month also needs to be taken with a pinch of salt. When the stock has fallen so much, a 100% move doesn’t actually equate to much when you take a step back. The fact that it went from 3p to 6p is one thing, yet it was trading above 20p only three months back. So, I need to be careful before getting excited about seeing a large percentage increase.
Overall, Cineworld struggled during the pandemic and had to take on more debt to survive. It’s now feeling the full impact of that. This is reflected in the share price movements. I’m going to wait on the sidelines for more information before making any decisions here.
