2020 was a tough year for the Cineworld (LSE:CINE) share price. With the pandemic putting a halt on most film productions and lockdowns closing cinema locations, the company has struggled to keep up with its expenses.Â
But recently, the Cineworld share price has been on the rise. Over the last six months, it has gone from 28.5p to just over 122p today. That’s more than a 300% increase!Â
What’s going on? And should I consider adding the stock to my portfolio? Let’s take a look.
The Cineworld share price is climbing
Cineworld’s share price first began recovering in the latter part of 2020. The company secured an additional $450m loan to see it through the winter period. And also managed to secure waivers on all of its bank loans covenants until June 2022. This ultimately removed any restrictions on its ability to borrow more money over the next year or so. While the rising debt is concerning, it gave the business a new lifeline.Â
More recently, the UK government unveiled its plans to slowly lift lockdown restrictions. Under the proposed roadmap, indoor entertainment providers like Cineworld are set to re-open their doors as of April 12th 2021.Â
Needless to say, that is fantastic news for Cineworld’s UK operations. Especially since the Bank of England released a report showing the household savings ratio (household savings as a proportion of disposable income) increased from 9.6% to 29.1%. Combining that information with economist forecasts of consumer spending in 2021 makes me believe that many people will be eager to return to the big-screen experience.
Cineworld owes a lot of money
While the near future of Cineworld and its share price looks promising, I have some concerns over its long-term capabilities. Most notably, the aforementioned rising debt levels.
Borrowing money in times of crisis is not an unusual activity, and in some cases, can be a wise decision. However, due to Cineworld’s acquisitive growth strategy, the firm was already riddled with debt before the pandemic hit.
In 2019 it generated $725m of operating profit. However, due to having nearly $7bn of debt on its balance sheet, $499m of that profit was gobbled up by interest payments on loans. After borrowing more money in 2020, its total debt level now sits at around $8.5bn.Â
Even if Cineworld returns to its pre-pandemic level of operations soon, the increased leverage will likely consume most, if not all, of the remaining profits to cover interest expenses. Consequently, I think it’s unlikely to see a return of shareholder dividends any time soon.Â
The bottom line
As more vaccines are distributed and cinemas re-open, I think it’s possible to see the Cineworld share price recover over the next year or so. However, growth beyond that seems questionable to me.
The highly leveraged state of the business is a severe problem in my eyes. With hardly any spare profits after interest expenses and taxes, its financial performance could be crippled for many years. And with plenty of other businesses with significantly healthier balance sheets out there, Cineworld is not a company I am interested in owning.
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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.