Cannabis Industry's Liquidity And Leverage Trends Uncovered

Viridian Capital Advisors tracks valuation and credit metrics for about 350 public companies weekly. Each company is assigned to one of 12 industry subsectors since valuation and credit statistics vary significantly between sectors.

• The graph shows the liquidity and leverage ratios of the cannabis subsectors. We have eliminated three sectors from the chart: Consulting, Real Estate, and Investment/M&A.  Consulting has only four members, all of which have market caps under $10M. The other two groups are chiefly cannabis lenders and SPACs, whose balance sheets are not comparable to the other groups. 

• The graph shows two of the most significant ratios employed in the Viridian Capital Credit Tracker Scoring Model.

  • The free cash flow adjusted current ratio is our top liquidity ratio as it updates the classic current ratio using cash flow information. The current ratio has gone out of favor in corporate credit analysis because most sizeable corporations maintain standby credit lines to augment their liquidity. The ratio is far more helpful in cannabis, however, since few cannabis companies, even non-plant touching ones, have bank liquidity lines. We add annualized free cash flow to the numerator to adjust for cash burn. Surprisingly, the median value for every sector is below 1x, indicating that over half of our sample companies will likely need additional financing during 2023.

  • Total liabilities to market cap is our most relied-upon leverage ratio as it gives a market-based view of the coverage of asset values over liabilities. Total liabilities are used instead of total debt because they include essential items like taxes payable and lease liabilities. The graph shows that sectors with low median liquidity tend to exhibit lower market leverage.

• The Psychedelics and Software sectors have the lowest liquidity with the most pressing need for additional financing. Luckily, both sectors are non-plant touching and have attracted institutional capital. Agriculture Technology is also non-plant-touching but has significantly higher leverage, making its .08x liquidity ratio more troubling.

• The Cultivation & Retail sector has one of the highest leverage stats, partially because its hard assets have increasingly allowed it to utilize debt financing. While the median leverage stat of 1.94x is reasonable, we note that over 25% of the 105 companies have leverage measures over 7.9x, indicating significant stress/distress .

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.