Is the Cineworld share price destined for disaster?

Rupert Hargreaves explains why high debt level could send the Cineworld share price lower if interest costs rise.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Whenever I’ve covered the Cineworld (LSE: CINE) share price, there’s always been one red flag which has stood out to me. 

This red flag is debt. According to its interim results release, the group’s external borrowings, after deducting cash, totalled $4.63bn (£3.4bn) at the end of June.

By comparison, the group’s current market capitalisation stand just under £1.1bn. To put it another way, Cineworld’s debt is three times greater than its market value. 

This seems to be one of the reasons why the Cineworld share price has performed so poorly over the past 24 months. The company entered the coronavirus crisis with a lot of debt on its balance sheet. Analysts were already questioning its financial position before it had to shut most of its theatres for a year. 

And with so much debt, it’s questionable whether or not the company will ever pay off this enormous liability. If it can’t, there’ll always be a risk creditors will pull the plug. That’s why there’s a genuine chance the Cineworld share price could be heading for disaster. 

Creditor obligations

However, Cineworld’s overall debt level isn’t really the most worrying factor here. The most chilling aspect is the sheer scale of the company’s interest bill. 

During the six months to the end of June, the group paid a staggering $417m in finance expenses, costs and interest associated with its loans. Net financing costs, after deducting interest paid on cash balances, came in at $343m. 

These figures imply Cineworld will pay out around $700m in financing costs this year. In 2019, the group’s interest bill totalled $467m. That year, before the pandemic rocked the world, the organisation reported a pre-tax profit of $183m. 

What’s worrying about these numbers is that even if the group returns to 2019 levels of activity, its interest bill is now so high it will swallow any profit

A threat to the Cineworld share price

The group can barely afford its interest bill as it is, but analysts are already speculating interest rates could rise next year. This may increase the company’s cost of debt and only make it harder for the firm to pay off creditors. 

That said, the company’s exploring a listing in the US. This could raise much-needed capital, which it could use to pay off borrowings. It can also issue new shares to investors and use this money to reduce debt. So the company’s fate isn’t set in stone.

However, I think the risks of owning the Cineworld share price are too great at present. That’s why I wouldn’t buy the stock for my portfolio. If interest rates start to rise substantially, it could have serious issues.

I believe the group’s not destined for disaster, but it could come close to it in the worst-case scenario. 

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 assessed. Consider taking independent financial advice.

Rupert Hargreaves 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »