Here’s why AMC’s biggest figure could be $ 5.5 billion


AMC Entertainment Group (NYSE: AMC) is set to recover from the devastation caused by the coronavirus pandemic. Almost all of its movie theaters are reopened, and guests are slowly returning to watch movies on the big screen. The company is no longer in crisis management mode as it was at the start of the pandemic.

At that time, it was burning hundreds of millions a month and needed the money to survive the uncertain length of its theaters’ closure to the public. With the crisis largely averted, AMC can focus on making a profit, a feat that will admittedly be difficult and could take several quarters or years. In this next challenge, AMC’s most crucial number could be $ 5.5 billion; it is the amount of interest-bearing debt that the company has on its balance sheet.

AMC has $ 5.5 billion in debt on its balance sheet. Image source: Getty Images.

AMC’s debt is a burden

Interestingly, AMC generated $ 239.6 million in interest expense in its first two quarters of fiscal 2021. On an annualized basis, this would amount to $ 479.2 million. To put that number into context, AMC has not made any operating profit above $ 310 million in the past decade. Therefore, if the company does not reduce its interest charges, it is unlikely to return to profitability.

Already, management has taken a step in the right direction. AMC announced on September 30 that it had paid off a debt of $ 35 million that cost the company at least 15% interest. The move is another example of skillful management by AMC’s talented team. They’ve been battered in the form of a pandemic and have done a great job of minimizing the damage.

Fortunately, AMC’s participation in a meme stock rally has increased its share price by 1,800% this year. Management opportunistically used a high stock price to issue shares to raise funds. During the quarter ended June 30, the company raised $ 1.25 billion in equity. These funds can greatly contribute to the long-term prospects of the business.

AMC’s path to profitability

Notably, while the company has $ 5.5 billion in debt on its balance sheet, not all of them are high interest debt. Of its total borrowings, $ 1.8 billion carries a reasonable interest rate of around 3%. At this rate, it’s not much of a burden on the business, especially if AMC can find profitable capital investment opportunities that can generate higher rates than the debt costs.

To be even more precise, the company’s heaviest debt is $ 1.5 billion at an interest rate of at least 10%, with the principal due in 2026. That alone $ 1.5 billion dollars weighs on the company for $ 150 million a year in pre-tax interest expense.

AMC already has $ 1.8 billion in cash on its balance sheet. Suppose business operations can improve enough to start generating positive cash flow. In this case, it may soon be able to significantly reduce one of its main obstacles to profitability: interest charges.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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