Weekly Sector Credit – Cross-Sector Leverage and Liquidity

• The chart below presents the median leverage and liquidity measures of different sectors within the cannabis universe. We have used Viridian’s favorite two ratios here:  For liquidity, the free cash flow adjusted current ratio, beginning with standard balance sheet liquidity but adjusting it for cash burn.  For leverage: total liabilities to market cap, a ratio that we have demonstrated to have a close relationship via option pricing with a company’s market value of assets/ total liabilities (asset coverage).
• For the most part of the parings of leverage and liquidity make sense, given the nature of the sector. For example, psychedelics generally scores weakly on leverage because all of the companies have negative free cash flow due to their pre-revenue status and need to fund expensive clinical trials.  It also makes sense that psychedelics have low market leverage.  Their assets in terms of IP can be quite valuable, but the lack of hard assets for debt collateral restricts their ability to fund with debt.
• Similarly, cultivation has one of the highest leverage ratios and one of the best liquidity ratios. The sector has hard assets that can be used as collateral for debt, which in turn allows for significant cash balances.  The sector also demonstrates significantly positive EBITDA.
• Pairwise comparisons, however, can be revealing: Ag Tech, for example,  has both significantly lower leverage than software, but also materially better liquidity.  Seems to be a better credit bet doesn’t it?