Whenever I’ve covered Cineworld (LSE: CINE) The share price, there was always a red flag that stood by me.
Hate this red flag. According to its interim results, the group’s external ingots, after cash cuts, totaled $ 4.63bn (£ 3.4bn) at the end of June.
By comparison, the group’s current market capitalization stands below 1.1bn. In other words, Cinworld’s debt is three times its market value.
Seanworld’s share price seems to be one of the reasons it has been so bad in the last 2 months. The company has entered the coronavirus crisis with a lot of n on its balance sheet. Analysts were already questioning its financial condition as most of its theaters were closed for a year.
And with so much debt, it is doubtful whether the company will ever pay off this huge debt. If it can’t, always risky donors will pull the plug. That’s why there’s a real chance that Cineworld stock prices are heading for disaster.
Obligation of the creditor
However, Cineworld’s overall debt level is not really the main concern here. The coolest aspect is the sheer scale of the company’s interest bill.
In the six months since the end of June, the group has paid a staggering 417 million in money, costs and interest associated with its debt. The net financing cost came to 343 million after deducting interest paid on the cash balance.
These figures mean that Cineworld will spend about 700 700 million in financing this year. In 2019, the group’s interest bill was $ 467 million. That year, before the epidemic shook the world, the company reported a pre-tax profit of 3 183 million.
The concern about this number is that if the group returns to its activity level in 2019, its interest bill is now so high that it will consume no profit.
Threat to Cineworld’s share price
The group may not be able to bear its interest bill just yet, but analysts are already speculating that interest rates could rise next year. This can increase the cost of the company’s debt and make it harder for the firm to repay the creditors.
That said, the company is exploring a list in the United States. It can raise much needed capital, which it can use to pay off. It can issue new shares to investors and use this money to reduce money. So the fate of the company is not set in stone.
However, I think the risk of owning a Cineworld share price right now is much higher. That’s why I don’t buy stock for my portfolio. If interest rates start to rise significantly, this could be a serious problem.
I believe the group is not destined for disaster, but in the worst case scenario it could come close.
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Rupert Hargreaves has no position on any of the shares mentioned. Motley Flower UK has no position on any of the shares mentioned. Opinions expressed in the companies mentioned in this article may differ from those of the author and therefore our official recommendation in our subscription services such as Share Advisor, Hidden Winner and Pro. Here at The Motley Flower we believe that considering a variety of insights makes us a better investor.