One of the most turbulent stocks in recent months has been Cineworld (LSE: CINE). In the space of three months, the Cineworld share price has reached lows of 22p, before climbing to over 100p. The share price currently stands at around 63p, which is still a 70% year-to-date fall. But with a number of severe issues in the cinema industry at the moment, are the shares too cheap to ignore or do they have further to fall?
Cineworld shares are a risk
The entertainment industry has been one of the hardest hit by the coronavirus pandemic. For Cineworld, it has meant shutting cinemas around the world, along with having a monthly cash burn of around $115m. This has since been reduced to ‘only’ around $45m.
While a reopening for cinemas is now imminent, the business will still be a significantly less profitable enterprise. How so? Capital expenditures will increase due to new safety guidelines. This includes hand sanitisers on entry, protective screens for staff members and extra cleaning. In addition, fewer customers will further reduce profits. The decline in customers will be especially serious in cinemas not only due to social distancing measures, but also a potential reluctance to watch films for several hours in the close proximity of others, and few new films being released. These factors certainly justify why Cineworld shares are so cheap at the moment and they make it a risky investment.
What does the balance sheet look like?
When investing in riskier stocks, a strong balance sheet can often help limit the damage. Unfortunately, Cineworld’s balance sheet is not as sturdy as I would like. Firstly, the company’s debt sits at $3.6bn. This is especially large as shareholders’ equity currently stands at only $3bn and it only has around $140m of cash. The result of such a large amount of debt, along with the impact of coronavirus, has resulted in it backing out of its $2.8bn Cineplex acquisition. While I believe that this was the correct move, it still opens it up to unwanted legal proceedings.
On the other hand, a new $250m secured debt facility and a revolving credit facility increase of $110m have boosted Cineworld shares. It has also secured $45m through a coronavirus borrowing scheme in the UK and is looking to access $25m through the US government Cares Act. This should provide the company with further liquidity and ensure its survival, albeit in a damaged form.
Would I buy Cineworld shares?
All in all, the future does not look bright for Cineworld. This means that the recent positive news of reopening should be taken with a pinch of salt. In fact, Cineworld shares have been on the decline since 2017, and the pandemic has only quickened its decline. On the other hand, at its current price, there is no doubt that Cineworld shares are cheap. With a P/E ratio of 5.4 and a price-to-book value of 0.3, it could be a very tempting investment for risk-tolerant value investors. Personally, I would just prefer a company with a stronger balance sheet and a brighter future.
Stuart Blair 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.