Stock market crash: here’s what I’d do about the Cineworld share price

The Cineworld share price looks cheap after the stock market crash, but the company faces an uphill struggle to return to growth.

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The Cineworld (LSE: CINE) share price has been a terrible investment this year. Shares in the cinema group crumbled in this year’s stock market crash as the company was forced to close its whole estate. 

The group has finally begun to reopen its cinemas. However, it could be a long time before the business returns to 2019 levels of profitability.

With that being the case, today, I’m going to explain in more detail why I think investors should view the Cineworld share price with caution. 

Cineworld share price concerns

The most significant risk facing Cineworld right now is liquidity. The company has taken multiple actions to shore up its balance sheet over the past few months, but these may not be enough. A second wave of coronavirus or prolonged economic slump could cause the corporation significant financial pain. 

One of the most prominent reasons why companies fail is because they have taken on too much debt. Cineworld’s balance sheet was already weak heading into the crisis. It has only become weaker over the past few months.

This could put the firm in a difficult position. Management has been using debt to acquire other cinema companies around the world in recent years. The organisation has been able to do this thanks to strong cash generation from its theatres. A slate of highly popular film releases has also helped. 

If capacity in the company’s theatres is restricted for a prolonged period to maintain social distancing, this could disrupt group forecasts and hurt the Cineworld share price.

At the same time, production companies are increasingly shifting their focus online.

For example, streaming giant Disney recently skipped over cinema owners by releasing its blockbuster Mulan remake directly onto its streaming service, Disney+. If this trend gains traction, Cineworld could have some serious problems. 

Cloudy outlook

Considering all of the above, even though the Cineworld share price looks cheap after the recent stock market crash, I think investors should adopt a cautious approach towards the business. 

If the company can open all of its cinemas next year, and attendance returns to 2019 levels, the Cineworld share price could double or even triple from current levels.

However, a second wave of coronavirus or prolonged social distancing requirements will prove difficult for the company. It will have to borrow more money, or possibly issue new shares. This would dilute existing shareholders and make it harder for the Cineworld share price to return to previous highs. 

As such, it seems as if this investment is only suitable for the most risk-tolerant investors. The stock could increase significantly from current levels, but it could also fall further.

The best way to benefit from any potential gains while minimising losses could be to hold Cineworld shares as part of a diversified portfolio. If the company’s recovery starts to gain traction, investors can always increase their position. 

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 owns no share 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.

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