Cannabis Chart Of The Week: The Top Ten Canadian LPs By Credit Quality

The Chart shows the top ten Canadian cannabis companies by credit quality (based on the Viridian Credit Tracker Model). The best-ranked credits are on the left.

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• The Viridian Capital Credit Model uses 11 financial and market variables to calculate four primary credit factors:

  • Liquidity:  measured by the traditional current ratio and a free cash flow adjusted current ratio that accounts for the company’s cash burn.

  • Leverage: four indicators of market leverage, balance sheet leverage, and cash flow leverage. The highest weighted indicator is total liabilities/ market cap.

  • Profitability: three indicators that include both historical and projected items.

  • Size:  two variables that incorporate balance sheet and market-based data.

• The model utilizes the four credit factors to determine an overall credit score and credit rank. To a degree, weaknesses in one factor can be compensated for with strengths in other elements. Leverage and Liquidity are the top two weighted factors.

• The red line on the graph depicts the Leverage rank; the black line shows the Liquidity rank.  The overall Viridian Credit rank is in green.  Note: the Profitability and Size ranks are not displayed on the graph.

• OrganiGram OGI is the top-ranked credit due to its 4th ranking in Liquidity, 2nd ranking in Leverage, and reasonable Profitability and Size scores.

• Avant Brands’ AVTBF small size is more than made up for by its top leverage score and #2 Liquidity marks.

• Cronos CRON is a good example of compensating factors. Poor Profitability is offset by excellent Liquidity to result in a #6 overall ranking.

• Aurora Cannabis ACB at #10 is perhaps the most controversial of the top ten. We would have ranked this company very differently a year ago. Despite its continuing high Leverage, the company has achieved positive EBITDA and has good balance sheet liquidity and financial flexibility. The recent political reversals in Germany may take some of the wind out of the company’s sails and warrant scrutiny.

• In the current capital-constrained environment, stock selection must be based on careful analysis of credit factors, especially Liquidity, and Leverage.

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.