Cineworld’s £4.4bn horror movie
A case study in spotting dying companies before it’s too late
Introduction
Colleagues have insisted that I write about Cineworld, which has gone bust from a peak market capitalisation of £4.4bn ($5.8bn) in April, 2019. I looked at Cineworld for an institutional client in February 2020, and found many signs of earnings manipulation and my client agreed to dump their position. (They have $200bn AUM, so it was likely a decent slug).
In this article, I will reveal some aspects of my approach to reading accounts and spotting these warning signs. My work was mainly done before the UK lockdown which started on 23/3/20, although it was clear then that Covid was going to affect cinema attendance.
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But first, onto how you could have spotted Cineworld was in trouble.
First Things First: A Common Mistake
When they’re looking at a new company, many investors start with the IR section of the firm’s website. While this can help you understand what the company does, never forget that it’s designed to sell you the stock. Here is Cineworld’s IR Page:
I haven’t read it in detail, but I can guarantee you that it doesn’t say “we are betting the shareholders’ equity with a huge burden of debt and our survival is at risk”. To be fair, the Key Facts page is quite informative:
The issue with IR pages is that if you start here, you are fed info and it creates an inbuilt bias. The company anchors you on certain numbers and you go away impressed. That’s not conducive to an informed investment decision..
So if that isn’t the place to look, where is?
Paying subscribers can read on to learn why I told my client Cineworld stock was dangerous in early 2020. The article covers:
Cineworld’s accounting policies
The audit report
The auditor
A revealing typo in their accounts
Their use of non-GAAP
An issue with the shareholder list
An issue with the directors
Related party transactions
Margin analysis
Working capital ratios
Indebtedness
The report was 20 pages long and the client paid a lot of money for it. So if you have paid $16/mth or $160 pa, I hope you’re pleased with the bargain you are getting.
If you aren’t yet a paying subscriber, perhaps you’ll consider joining and reading the full version of today’s article. The lessons can be applied to pretty much any public company, and they could help you avoid drawdowns of 85% like the one Cineworld shareholders have endured in recent weeks.