Cineworld (LSE: CINE), as you probably know, is a UK-based cinema chain but with international outlets. It operates in 10 countries, and is currently valued at £2.4bn by the market.
I don’t like the company as an investment, because in the last trading update the company reported a decline in revenue of 9.7%. That’s a lot – and in the US, the decline in revenue was 10.9%. In the UK, it was 9.7%.
What does a decline in revenues mean?
When a company’s revenue is declining, it means that the business is no longer growing. It’s receding. A decline in revenue means that it is hard for a business to grow profits, because profits are usually grown from an increase in revenue.
Sure, one can cut costs, and make other efficiencies. But cutting costs can only be done so far before you’ve trimmed the fat and are now cutting into bone. Greater efficiency can only provide a limited amount of benefits.
When a company is no longer growing, growth investors are not interested. But it also puts pressure on dividend holders too. If a company is seeing its profits shrink, what does that mean for the dividend? Unless the business can turn itself around, then that precious dividend may be threatened.
Cineworld has a large pile of debt
Cineworld’s debt was £2.5bn at the end of June 2019, and the company announced a debt-financed acquisition to acquire Cineplex. That takes Cineworld’s debt even higher, and I personally would rather invest in businesses that have little to no debt on their balance sheet.
This is because when times get tough, a healthy balance sheet can withstand and navigate a stormy period. When debt holders have a claim over the company’s assets, they can just decide to pull the plug on the company and exercise that claim.
The companies I want to buy
Cineworld does not meet my criteria for stocks to buy. First of all, if a company can’t grow its revenues, then it will struggle to grow its profits. And if it can’t grow its profits – why would I be interested? I want to make money with my investments, and a company that isn’t growing is not for me.
Even if I was investing for income, I’d want a stable, steady business foundation. Declines of 10% or more in its core countries suggest Cineworld is not stable.
Secondly, I don’t want debt in my companies. With all of the stocks available in the investing universe, why pick a company that is highly levered when there are businesses that have tidy balance sheets and are growing their profits?
Finally, I want companies that do not have to invest large amounts of capital into the business just to keep it going. Cinemas need refurbishing, and that comes at a cost.
For all the reasons above, Cineworld does not meet my criteria and I would sell it right now.
