The Cineworld (LSE: CINE) share price has increased in value by around 260% since its five-year low of 25p, printed in the middle of October last year.
However, despite this performance, the stock is still trading around 60% below its year-end 2019 level, before the coronavirus pandemic started to break out around the world.
As the UK economy begins to open up again, this performance suggests the Cineworld share price looks cheap. As such, I’ve recently been reviewing the business to see if it could be worth adding the shares to my portfolio.
Cineworld share price outlook
After more than a year of disruption, it looks as if Cineworld’s theatres will reopen on 19 May. Of course, if things change over the next few weeks, the company may be forced to close its screens once again.
Nevertheless, at this point, it looks as if the group is reopening in most of the UK for good.
Unfortunately, the company faces an uphill struggle to return to its pre-pandemic operating position. Last year, the group lost a staggering £2.2bn.
It also built up £6bn of debt and recently had to ask shareholders to approve yet another increase in its debt pile of £155m as part of its reopening preparations. This debt alone could hold back the Cineworld share price’s recovery.
Personally, I tend to avoid companies that have a lot of debt. There’s a simple reason why. Companies with a lot of borrowing don’t have control over their own futures. For example, last year, Cineworld paid financing costs of $717m on its debt mountain. For the year as a whole, the group’s revenues only amounted to $852m.
This revenue figure related to 2020, when most of the company’s theatres were closed for an extended period. However, if we look back to 2019, revenues totalled $4.4bn.
Even at this higher figure, it seems as if the group’s financing costs could consume as much as 16% of revenues. But, of course, that’s assuming revenues return to 2019 levels.
But even if revenues do return to those levels, the company may still have problems. It reported a statutory operating profit of $724m in 2019, excluding interest costs.
Virtuous cycle
I think these figures clearly illustrate the challenges hanging over the Cineworld share price. The coronavirus pandemic crippled the business, and the group’s colossal debt pile may threaten its recovery.
That said, as customers return, the group may be able to refinance its debt and lower interest costs. This could create a virtuous cycle.
Lower interest costs could free up more money to pay down debt. This would allow the enterprise to reduce debt and free up more cash. Management will be hoping the company meets this optimistic scenario. But, unfortunately, there’s no guarantee it will.
As such, I think the Cineworld share price will continue to struggle to move higher until the business can meaningfully reduce its borrowings. Therefore, I’m not a buyer of the stock today. I think there are plenty of other firms on the market with brighter recovery prospects.
