The Cineworld (LSE: CINE) share price has been rising recently, but perhaps not as fast as some investors might like.
Indeed, even though the company has recently reopened all of its theatres across the UK and US, the stock has fallen more than 20% from its 52-week high of 122p, reached in the middle of March. Over the past 12 months, the stock has returned -1.2% overall.
Shares in the cinema group have languished despite the company reporting a “strong opening weekend” last weekend. In a statement to the market last week, the firm said that more people than expected returns to its theatres as the UK lockdown eased.
It also reported “good concession income” as cinemagoers stocked up on treats. Cineworld has reopened 97% of its cinemas in the US and expects to open most of its screens around the world by the end of May.
Cineworld share price outlook
In theory, now that customers are returning, the market should be more receptive to the Cineworld share price. When the stock reached its 52-week high back in March, it didn’t have any income, and some serious questions were being asked about whether or not it would be able to survive.
However, today customers are spending their money with the business, which should provide much-needed cash flow to service debts and meet other obligations.
This suggests to me that the stock should be worth more today than it was in March. But, unfortunately, the market tends to concentrate on what could happen in the future rather than what’s happening right now. And it seems to me this is why the Cineworld share price has struggled to move higher in the past few weeks.
It looks as if investors are concentrating on the company’s risks. There are quite a few. Cineworld’s debt pile has ballooned to more than eight times earnings before interest, tax, depreciation, and amortisation (EBITDA) over the past 14 months. I tend to think businesses with a debt-to-EBITDA ratio of more than two or three are too risky.
What’s more, the business is highly susceptible to further coronavirus restrictions. Packing a large number of people into an enclosed space is exactly the kind of environment where the virus thrives.
Coronavirus threat
If there’s another wave of the virus, Cineworld is likely to be one of the first companies to feel the pain. With so much debt on its balance sheet, the group can’t really afford another shutdown.
Considering these risks, it’s clear to me why the Cineworld share price isn’t rising faster despite the reopening of cinemas. Indeed, even though the company’s prospects have improved marginally over the past two weeks, I am going to be staying away from the stock myself.
I think the risk of another shutdown and the impact that may have on the business is just too great. I’d rather buy other companies with cleaner balance sheets and better growth prospects.
