What happened

Shares of U.K.-based Cineworld (CNWGY) (CNNW.F) plunged more than 50% on Friday following a similar plunge on Wednesday of this week.

On Wednesday, Cineworld released a statement to the London stock exchange, saying that its liquidity was now in question amid a disappointing moviegoing recovery and limited film slate in the second part of summer. Then on Friday, the Wall Street Journal reported the company, which is the second-largest theater company in the world and the owner of U.S.-based Regal Cinemas, was preparing to file for bankruptcy "within weeks."

So what

While the pandemic was thought to have wiped out movie theater operators when it struck in early 2020, most theater chains survived by taking on debt and running down their cash over the past two years with the hope that a return to theaters would allow them to eventually pay back their loans. However, the U.K. reopening has been disappointing thus far, and it turns out the largest pandemic shock effects might have just been delayed until now.

Wednesday's statement didn't mention bankruptcy specifically, but Cineworld did admit it was looking to restructure its debt load, which totaled $4.8 billion at the end of last year. That could involve a highly dilutive capital raise, and it's why the stock fell so much on Wednesday.

However, if the stock price is so low that it would massively dilute shareholders, a capital raise might not even do the trick. On Friday, the Journal reported that Cineworld had hired bankruptcy specialists Kirkland & Ellis LLP and AlixPartners consultants to advise on a Chapter 11 bankruptcy, according to people familiar with the matter.

While a bankruptcy might not mean an entire wipeout of shareholders, oftentimes, it does, and it will be a long time before the matter is settled. As of this afternoon, Cineworld's market cap has plunged but still remains around $80 million, suggesting some might think the company could skate by with dilution or that equity holders will retain some stake following a bankruptcy proceeding.

Now what

Cineworld should serve as a warning to investors in peers like AMC Entertainment (AMC -5.17%), as well as cruise line stocks, that although the economy is reopening, that doesn't mean things are back to "normal." Remember, these types of businesses, which had to completely shut down during the pandemic, took on enormous debt loads, which now have to be paid back.

But with high inflation and fears of a global economic slowdown, particularly in Europe, that recovery might be muted at best. To be sure, movie theaters are particularly precarious given lower moviegoing audience numbers even prior to the pandemic and the rise of at-home streaming. Cruise lines don't have these particular long-term secular headwinds and might be able to recover better. Still, they remain on the clock to generate profits shortly, or they could face a similar fate.

Investors should remember that "pandemic" versus "reopening" stocks is too simple a distinction. Be sure to look at companies' balance sheets in these precarious times. Those businesses with high debt loads might have serious trouble in this age of rising interest rates, and as Cineworld shows, some might not make it to the other side.