The last time I covered the Cineworld (LSE: CINE) share price, I noted that while the stock looked cheap after recent declines, as an investment, it was a risky proposition.
This turned out to be the right advice. Following the company’s decision to shut all of its UK and US screens, it now looks as if the business is fighting for its very survival.
As such, I think it could be time for investors to cut their losses and sell the stock. Today I’m going to explain why I hold this view.
Cineworld share price: further to fall
At the beginning of the coronavirus pandemic, Cineworld’s management pulled out all of the stops to try and steer the business through the uncertainty.
These efforts helped steady the ship, but it’s starting to look as if they weren’t enough.
The company entered the crisis with a fragile balance sheet, which limited its options. At the beginning of the crisis, Cineworld’s net debt to earnings before interest tax depreciation and amortisation (EBITDA) ratio was around five. As a rough guide, a company with a net debt to EBITDA ratio of more than two is considered to have a lot of borrowing.
So, even before the crisis, Cineworld’s financial position was precarious.
And following the pandemic, customers are wary about spending two hours in an enclosed space with other people. As a result, even though the group had reopened many of its theatres, attendance remained so low the firm wasn’t covering its operating costs.
Therefore, closing cinemas will help the company. It‘s currently burning around $50m a month keeping the theatres open.
But this is only half of the picture. Cineworld still has to meet the interest obligations on its $8.2bn of net borrowing.
In the six months to the end of June, interest costs on this borrowing amounted to $310m. This is why the Cineworld share price has slumped in 2020. The numbers suggest the group needs $620m a year just to sustain its debt.
For comparison, the group’s current market capitalisation is just under $450m (£346m).
Cut losses
Considering all of the above, I think investors should cut their losses and sell the Cineworld share price.
The group has so much debt it looks as if a restructuring is almost inevitable. In this situation, shareholders may be left with nothing. As such, while it may be tempting to buy or double down on the stock after its recent declines, I reckon investors should stay away.
The chances of insolvency have increased dramatically this week, and even if the company can stage a recovery, its colossal debt pile will remain a drag on growth for years to come.
In my opinion, there are plenty of other companies out there that offer better growth potential with much less risk.
