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Here's Why AMC's Most Important Number Could Be $5.5 Billion

By Parkev Tatevosian, CFA – Oct 6, 2021 at 6:16AM

Key Points

  • AMC's most burdensome debt is costing it $150 million per year.
  • Management is moving in the right direction in paying down high-cost debt.
  • It may take years for the company to operate at a profit.

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AMC appears to have staved off the worst-case scenario of the pandemic; the next step is becoming profitable again.

AMC Entertainment Group (AMC -8.81%) is on its way to recovering from the devastations caused by the coronavirus pandemic. Nearly all of its movie theaters are reopened, and guests are slowly coming back to watch films on the big screen. The company is no longer in crisis management mode as it was at the pandemic onset.

At that time, it was burning through hundreds of millions per month and needed cash to outlast the uncertain duration its theaters were closed to the public. With the crisis mostly averted, AMC can shift its focus to turning a profit, a feat that will admittedly be challenging and could take several quarters or years. In this next challenge, AMC's most crucial number could be $5.5 billion; that's how much interest-bearing debt the company has on its balance sheet.

A group of kids watching a movie in a movie theater.

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

AMC's debt is a burden 

Interestingly, AMC has generated $239.6 million in interest expenses in its first two quarters of fiscal 2021. Annualized, that would turn out to be $479.2 million. To put that figure into context, AMC has not earned over $310 million in operating income in any year during the past decade. Therefore, if the company does not reduce its interest expenses, it has little chance of returning to profitability.

Already, management has made a move in the right direction. AMC announced on Sept. 30 that it paid back $35 million in debt that was costing the company at least 15% interest. The move is yet another example of skillful management by AMC's talented team. They were dealt an awful hand in the form of a pandemic and have done an excellent job minimizing the damages.

Fortunately, AMC's part in a meme stock rally has increased its stock price by 1,800% this year. Management opportunistically used an elevated stock price to issue shares to raise cash. In the quarter ended Jun 30, the company raised $1.25 billion in equity capital. Those funds can go a long way in helping the company's long-term prospects.

AMC's path to profitability

Notably, while the company has $5.5 billion in debt on its balance sheet, it's not all high-interest debt. Of its total borrowings, $1.8 billion is at a reasonable interest rate of roughly 3%. At that rate, it's not much of a burden to the company, especially if AMC can find some profitable capital investment opportunities that can return higher rates than the debt is costing.  

Getting even more specific, the company's most burdensome debt is $1.5 billion at an interest rate of at least 10%, with the principal due in 2026. This $1.5 billion alone is hitting the company for $150 million per year in before-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 flows. In that case, it may shortly be in a position to significantly reduce one of its biggest roadblocks to profitability -- interest expenses.

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

AMC Entertainment Stock Quote
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