Shareholders in cinema operator Cineworld (CINE) face an uncertain future as the company confirms it may enter Chapter 11 bankruptcy in the US.

The best outcome if it goes down this route is, in its own words, ‘very significant dilution’ for existing investors as the company faces a testing combination of weaker trading and an extremely stretched balance sheet.

This is reflected in a share price which is down 87% since close on 16 August as rumours around the financial situation of the business started to build. At 2.7p as we write, the shares are down more than 99% from highs above 300p seen in 2019.

While Cineworld hasn’t been helped by a lack of blockbuster releases this year, its real problems stem from its level of borrowings. Net debt at the last count totalled more than $4.8 billion.

The company took on significant leverage as part of the $3.6 billion deal to acquire US operator Regal in 2018. This may have made it the second largest cinema chain in the world but, from that moment, it was always vulnerable to a big extraneous shock which was then provided by the pandemic.

It stands in stark contrast to the position of the number one player in the cinema world, AMC Entertainment (AMC:NYSE). AMC benefited from the ‘meme stock’ phenomenon as investors coordinated their efforts through social media platforms to drive up its share price.

While the shares have subsequently retraced much of those gains and the company has been guilty of some questionable strategic decisions of late, including investing in a gold mine and launching a popcorn venture, it was shrewd in taking advantage of its moment in the spotlight to secure more funds.

The company raised $1.8 billion from shareholders in 2021 and is still sitting on cash of more than $1 billion. This provides it with a decent buffer to contend with any short-term downward trend in trading.

Cineworld’s UK peer Everyman Media (EMAN:AIM), which strives to deliver a high-end experience, has endured a sluggish share price performance in 2022, falling 18.3% this year.

In its latest trading update (27 July) the company confirmed it had increased its number of cinemas from 28 in the first half of 2019 to 37 and said it had delivered record sales and earnings in the first six months of 2022. Net debt stood at £8.4 million at the end of 2021. The company is scheduled to announce its first-half results in full on 28 September.

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