Is Cinemark Holdings, Inc.’s (NYSE:CNK) Balance Sheet A Threat To Its Future?

Mid-caps stocks, like Cinemark Holdings, Inc. (NYSE:CNK) with a market capitalization of US$4.8b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at CNK’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into CNK here.

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How much cash does CNK generate through its operations?

CNK’s debt level has been constant at around US$2.0b over the previous year including long-term debt. At this current level of debt, CNK’s cash and short-term investments stands at US$367m for investing into the business. On top of this, CNK has generated cash from operations of US$567m in the last twelve months, resulting in an operating cash to total debt ratio of 28%, signalling that CNK’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CNK’s case, it is able to generate 0.28x cash from its debt capital.

Can CNK pay its short-term liabilities?

At the current liabilities level of US$391m, the company has been able to meet these obligations given the level of current assets of US$485m, with a current ratio of 1.24x. Generally, for Entertainment companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

NYSE:CNK Historical Debt January 20th 19
NYSE:CNK Historical Debt January 20th 19

Can CNK service its debt comfortably?

CNK is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether CNK is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CNK’s, case, the ratio of 3.95x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although CNK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how CNK has been performing in the past. I recommend you continue to research Cinemark Holdings to get a better picture of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CNK’s future growth? Take a look at our free research report of analyst consensus for CNK’s outlook.
  2. Valuation: What is CNK worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CNK is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.