Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. Importantly, Cinemark Holdings, Inc. (NYSE:CNK) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Cinemark Holdings’s Net Debt?
As you can see below, at the end of September 2021, Cinemark Holdings had US$2.52b of debt, up from US$2.41b a year ago. Click the image for more detail. However, it does have US$543.0m in cash offsetting this, leading to net debt of about US$1.98b.
How Healthy Is Cinemark Holdings’ Balance Sheet?
We can see from the most recent balance sheet that Cinemark Holdings had liabilities of US$642.8m falling due within a year, and liabilities of US$4.12b due beyond that. Offsetting this, it had US$543.0m in cash and US$75.1m in receivables that were due within 12 months. So its liabilities total US$4.15b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$1.81b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Cinemark Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cinemark Holdings can strengthen its balance sheet over time.
Over 12 months, Cinemark Holdings made a loss at the EBIT level, and saw its revenue drop to US$942m, which is a fall of 32%. To be frank that doesn’t bode well.
While Cinemark Holdings’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$456m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$278m over the last twelve months. So suffice it to say we consider the stock to be risky.