AMC Entertainment (NYSE:AMC) produced less than stellar results on May 9 for the first quarter (Q1) ending Mar. 31. The movie chain reported that its free cash flow (FCF) for the quarter was negative $329.8 million. That is not good for AMC stock, at least in the near term.

AMC Entertainment still has a lot of net debt. For example, in Q1, it paid $82 million in interest expenses. Although this is down from $151.5 million a year ago, the problem is AMC Entertainment still has gross debt of $5.522 billion. After cash and cash equivalents of $1.165 billion, its net debt is $3.84 billion.

In the long run, the only real way that this is going to decline is through generating positive FCF. If AMC sells equity to new shareholders, it can reduce interest expenses and debt levels. But that would substantially dilute existing shareholders, which would automatically push the stock lower.

Other than that, these levels can’t fall without AMC generating positive FCF. This is the only way for the company to cut its debt and interest expenses without diluting shareholders.

AMC’s Prospects Going Forward

Analysts are increasingly positive about AMC’s prospects. However, the average analyst surveyed by Refinitiv on Yahoo! Finance has an estimate for earnings per share (EPS) of negative $1 per share versus negative $2.66 last year. Moreover, for 2023, the average of 8 analysts is still negative earnings of negative 56 cents. In other words, it might not be until 2024 before the company starts generating positive free cash flow.

And that is only if there is not a severe recession on the horizon. All bets are off if there is a period of slump in consumer demand and spending. This is likely to spill over into people’s budgets for entertainment, which could slow AMC’s return to profitability. That means it could still take several years for the company to reduce its debt and interest expenses.

Moreover, the average price target of 7 analysts covered by Refinitiv is $9.95 per share. That is about $2 below the stock’s present price as of May 14.

In addition, analysts have recently been dramatically lowering their targets. For example, as of Apr. 1, the average price target was over $29.40 per share according to Seeking Alpha. But now it’s at $9.55.

In other words, many analysts have become disillusioned with the progress of the company, especially since its Q1 earnings were released.

Where This Leaves Investors in AMC Stock

The truth is that the market will always discount the future prospects of a company. For example, let’s assume AMC can produce positive free cash flow by the end of next year when revenue is forecast to hit $5.26 billion.

If its FCF margin reaches 5% of revenue, AMC will generate $263 million in FCF during 2023 or shortly thereafter on a last 12 months basis. Here is how this affects the valuation of AMC stock.

If we use a 3% FCF yield metric to value AMC Entertainment, the target market cap works out to $8.766 billion. This is because using a 3% FCF yield is the same as multiplying the FCF estimate by 33.3 times. So $263 million x 33.3 equals $8.766 billion in target market cap.

That number is 44.6% over AMC’s present market cap of $6 billion. This shows that it won’t take much for AMC stock to rise to $17.07 per share (i.e., 44.6% over the May 14 price of $11.81 per share).

This shows that with just a turnaround of its FCF with higher sales, AMC stock could move significantly higher from here.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.