To my way of thinking, the Cineworld share price is one of two things right now. Either it’s currently cheap as chips, and therefore one of the biggest share bargains of all time, or it’s a dangerously, temptingly low share price with no upside and will leave investors crying into their popcorn.
If that sounds a tad extreme, that’s because I don’t think there is any comfortable middle ground here.
It seems to me that Cineworld’s future is a simple binary equation. The share price is cheap if the business can ride out Covid-19. However, if Cineworld cannot get through the pandemic and back to ‘normal’ life then any investment will be wasted. On balance, I think it’s worth taking some risk here. Let me explain why.
The Cineworld share price: not your normal kind of financial analysis
Financial ratios obviously have their place when assessing investment opportunities, but there are times when they can mislead. In the case of the Cineworld share price, I think they muddy the waters.
Looking at P/E ratios and the like is all well and good, but the way I see it what we fundamentally need to know about Cineworld is how much cash does the business have available and can it cover its debts in the short term?
On the back of this, what is happening in the wider world to encourage cinema-goers to venture out and see a movie? What is Cineworld revenue going to look like over the next 12 months?
Cash and debt: reasons to be cautious
It’s true that Cineworld has a massive amount of debt. There is no getting round this, and it’s a concern. A debt mountain of $4.6bn is eye-wateringly large, especially when there is an expectation interest rates will rise in 2022. It’s also true that the cash made available to Cineworld after crisis-led restructuring in late 2020 has helped the business navigate 2021 without further crisis, but this improved liquidity isn’t going to keep the wolf from the door forever, of course.
This brings us onto what is happening in the wider world. I am reasonably confident that if Cineworld shows increased revenue over the next year, then the markets will respond favourably. There is reason for optimism on this score.
Pandemic? What pandemic?
Whisper it, but cinema-going might well be a ‘thing’ again. The threat posed by the Omicron variant is arguably not as big as first feared and is increasingly downplayed by scientists. Indeed, cinemas have welcomed back patrons in ever-growing numbers lately.
Take the December 2021 release Spiderman: No Way Home movie, which became the third-fastest movie to gross a billion dollars. This followed the recent James Bond movie No Time To Die, which has pulled in around $775m. This is really positive for Cineworld and the movie industry in general.
I know I am disagreeing with some of my Fool colleagues here, but on balance Cineworld looks well worth a punt to me at a current share price of around 32p.
I’d appreciate it if you could do me a favour and watch your next movie down at your local Cineworld cinema!
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Garry McGibbon owns shares in Cineworld. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.