Could buying Cineworld shares be a classic beginner’s error?

looking at Cineworld (LSE: CINE) from some angles, it might look like a potential bargain. The chain with thousands of theaters has experienced a price crash. I can now buy over 20 Cineworld shares for a pound. That’s 90% lower than the price a year ago – and 98% lower than what I had to pay just five years ago.

I have no intention of putting my hard earned cash into the company. I think doing this can be a costly investment mistake that many investors make, but especially those who are inexperienced in the market.

Remembering why will hopefully help me avoid costly mistakes in the future and increase my return on investment. Let me explain why I see buying Cineworld as a classic rookie mistake.

Does stock price matter?

Cineworld shares are trading at around 4p each. But Game Workshop The shares are selling at almost £92 each. What does Cineworld stock mean?

Absolutely not. It is a beginner’s mistake to believe that stock prices alone provide useful information. Stock price is only one factor in the overall process of stock valuation.

Different companies decide the number of shares to be issued. For example, Games Workshop has 32.9 million ordinary shares on the stock exchange (this kind of information is available for free, just by reading the company’s stock market announcement). Cineworld, by contrast, has more than 1.3bn shares in issue.

In other words, buying one share in Cineworld gives me a fraction of a tier away from the company than buying one share in Games Workshop.

Investors and their value

But whether I have a fraction or 100%, in the end I still have nothing.

Now, Cineworld is useless. Its market capitalization is £58 million. But directors have repeatedly warned that as part of the ongoing reorganization, shareholders may be thrown out altogether. That would see the share price drop from the current 4p to zero.

Valuation is very important in investing, because as an investor, I try to buy stocks for less than I think they are worth.

It’s a classic rookie mistake to think that a company with a low stock price is cheap. Whether a stock is cheap or expensive depends on its value.

Ignore the balance sheet at your peril

However, one might protest, Cineworld can be big business.

Admissions remain below pre-pandemic levels. But in the first half of last year, 83 million customers visited cinemas. It has a well-known name, many theaters and a large customer base.

The problem is that Cineworld had net debt of $8.8bn at the end of the first half. That threatens to wipe out shareholders as creditors negotiate with the company on how to repay them.

For me, knowing that the net debt figure only makes Cineworld unable to invest quickly. The information is freely available in the company’s latest balance sheet, which is contained in the interim results.

Not looking at a company’s balance sheet before investing is a classic rookie mistake. Corporate balance sheets exist for a reason!