The Viridian Credit Tracker model is a valuable tool for investors and companies alike to gauge the credit quality of cannabis companies. The model utilizes 11 market-based and financial statement-based variables to measure four critical attributes of credit quality: Liquidity, Leverage, Profitability, and Size.

Credit quality is not a constant; market conditions and management decisions can influence it. Aggregate credit quality in cannabis has declined over the last year for several reasons. As both the availability and attractiveness of equity funding have fallen, companies have turned to debt financing for growth capital and to support cash flow shortfalls, resulting in several MSOs becoming overly leveraged. Rising market interest rates exacerbate the issue.

The companies that have improved the most over the last three months:

Trulieve (OTC:TCNNF) has improved significantly from the # 8 ranking in August to #2 currently. The company beat expectations on free cash flow in the 3rd quarter and used its cash to call its 9.75% bonds set to mature in 2023. The company has exited unprofitable markets in Arizona and Massachusetts and will gain handsomely if Florida goes rec.

TerrAscend (OTC:TRSSF) has improved from 14th position in August to 8th currently. TerrAscend has dramatically improved its profitability and is now 14th ranked compared to 23rd in August. Funds from operation / total liabilities, one of our key leverage indicators, has improved from 26th place to 14th place. TSND’s solid position in Maryland helped on both points.

Companies that have deteriorated the most over the last three months:

MariMed (OTC:MRMD) has declined from #2 in July to #9 currently. It missed its 3rd quarter consensus EBITDA estimates by a wide margin and has gone from 4th to 9th on leverage and from 7th to 13th on profitability. Still, we are big believers in the company’s strategy, management, and positioning and look forward to seeing them improve their ranking.

Vext (OTC:VEXTF) has declined from 4th rank in June to #13 currently. Like MariMed, Vext seriously missed its 3rd quarter EBITDA estimates, and its Profitability ranking has drastically reduced from #3 to #24. Still, the company enjoys strong liquidity and better-than-average leverage. Declines in the Arizona market have hurt the company.

Companies that manage cash flow and credit quality by extending or paying off maturing debt, tightening working capital, exiting unprofitable markets, and utilizing pockets of equity market strength to raise equity selectively, will be best positioned to benefit from the market upswing when rescheduling arrives.

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

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.