On a liquidity basis, one of the critical ratios we look at is the free cash flow adjusted current ratio. We generally take the most recent quarter of cash flow from operations minus capex and annualize it, then add that figure to the numerator in the classic current ratio. Sometimes, in companies with high seasonality, we may use a different annualization method. The ratio gives a good indication of whether a company is likely to need additional financing during the year. The top 5 credits have ratios of approximately 3x, while the top 10 score around 2.25 on average. Conversely, the lowest five rated companies have ratios that average 0.21x, while the lowest ten average .66x. It is essential to realize that the various credit factors interrelate. So, for example, low liquidity may not be much of a concern to a profitable company with low leverage, while borderline liquidity may rise to serious concern for a company that is already over-levered.
Another component that the Viridian Model strongly considers is leverage. We use four leverage indicators based on market value, balance sheet, cash flow, and forward EBITDA estimates. The most highly weighted variable, however, is total liabilities to market cap. The top five companies score an average of 0.36x, with the top ten averaging .58x. On the bottom end, the worst five ranked companies average 10.12x, and the bottom ten average 7.34x. We generally think that ratios above about 4x should cause significant scrutiny/concern. The next most highly weighted leverage indicator is funds from operation/ total liabilities. On this ratio, the top ten credits average .13x while the bottom ten average -.04x
The other two components of the Viridian Model are Profitability and Size. These ratios are more challenging to quantify and interpret. Intuitively, a company that never makes money will have a deteriorating balance sheet and market value over time. So, chronic unprofitability eventually shows up in our leverage ranking and/or liquidity ranking. However, we still look at profitability via projected year-ahead EBITDA margins (where available) and funds from operation to total assets. The top five on the later ratio score .09x while the bottom five score -.1x
Like in so many things- Size matters. If you are looking at two companies with identical financial ratios, the larger one is likely to have more financial flexibility and better overall credit quality. Why? Size is correlated with a lot of things. For one, the age of the firm. Bigger companies have typically been around longer and have developed business positions over that period that form partial moats. They also tend to have more ancillary assets that could be sold off if necessary to maintain liquidity. MedMen may be the poster child for this idea. Size isn’t everything, though. One of our top five credits, Grown Rogue, is ranked 17/30 on size.
View the Viridian Credit Tracker for a full analysis of our credit rankings and statistics for the cannabis industry.
About Viridian Capital Advisors, LLC
Launched in 2014, Viridian Capital Advisors was one of the first and now leading, corporate finance, advisory and M&A practices in the legal Cannabis/CBD industries, and now in the Psychedelics sector. We represent companies, investors, lenders, buyers and sellers. Our advisory practice is meant to help “institutionalize” our clients before they go to market for capital or M&A – by helping to build a professional Board of Directors, sophisticated financial models and valuation analyses, exit strategies and strategic advisory services. Our investment banking practice raises capital and executes M&A transactions through our New York City based broker-dealer, Bradley Woods & Co. Ltd.
Viridian is widely recognized as the industry leader in research and capital markets data/market intelligence through the Viridian Deal Tracker. Launched in January 2015, the Viridian Deal Tracker is a proprietary data service that monitors and analyzes investment, M&A activity and capital markets trends in the Cannabis, Hemp and Psychedelics industries. We’ve tracked and analyzed more than 6,500 transactions totaling more than $70 billion in transaction value. We know where equity investors invest, where lenders lend and where acquirers acquire. The Deal Tracker is received and read every day by thousands of leading industry players on a global basis, becoming a trusted and valuable source for companies, investors, lenders and sellers/acquirers to make informed capital allocation decisions.
Marijuana remains illegal under federal law. The federal government does not recognize marijuana to have any medicinal value. Marijuana cultivation, possession, consumption, sales, and distribution are illegal under federal laws and also certain state laws. Investors in cannabis may be subject to law enforcement actions. Please note that there are differences in marijuana laws from one state to another. Furthermore there are substantial risks associated with investing in cannabis companies, including, without limitation, changes in laws, rules, and regulations, risks associated with the economy, capital markets, and a company’s ability to execute on its business plan.
