It’s easy for anyone to see that Cineworld (LSE:CINE) shares have taken a pounding over the last few years. I bought the shares during the depths of the pandemic because I thought at some point the cinema firm would enjoy a recovery.
However, there appears to be more to this story than meets the eye. Let’s take a closer look.
Some worrying news
The company recently released a statement saying that sales hadn’t recovered at the required pace, and that it would have to deleverage in order to survive. This essentially means issuing more equity to reduce debt.
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As a shareholder, this was worrying because it means that my current holding may be diluted and be worth even less than it was before.
Shortly after it said it was potentially filing for bankruptcy in the US. This is another indication that the firm could be on the verge of financial destruction.
The market understandably interpreted both of these news stories negatively and the share price plunged from around 25p to 2p. At the time of writing, the shares are trading at 5.7p.
Financial woes
The pandemic and its associated restrictions forced the closure of cinemas worldwide. This had a devastating impact on the firm, and it slumped to significant pre-tax losses in both 2020 and 2021.
With dwindling revenue, it decided to take on more debt in order to continue its operations. This debt pile now stands at $9.23bn with a cash balance of just $354m.
The bad state of affairs that Cineworld now finds itself in started earlier, however. It tried to expand aggressively, buying Regal cinemas in the US and attempting to acquire Cineplex of Canada.
The latter deal was botched, and a lawsuit is ongoing. The result could determine whether Cineworld has to pay $1bn in damages.
Why I’m not selling
While most of the news about the company is negative, I don’t see much point in selling all my shares at the moment.
There are a few reasons for this. One is that there’s an attractive movie slate on the horizon, with films like Avatar 2 scheduled for release.
Also, there’s no telling what could happen in the coming weeks and months. While a takeover by a rival, like AMC Entertainment, is speculation at this moment in time, it’s not outside the realms of possibility.
Finally, I’m down so much on my initial investment already, I might as well wait and see if there’s any good news that can come from the business.
Overall, I wouldn’t yet say that my shares are worthless. I do admit, however, that this might become a reality soon. The business doesn’t appear to be healthy, and it may even be dying. So, while I won’t be selling my shares in a panic, I certainly won’t be adding to my current holding.
