Weekly Credit Tracker
Credit ratings are not currently available for public cannabis companies leaving companies, lenders and investors with a gap of information. The Viridian Cannabis Credit Tracker fills this gap. The model uses 11 market and financial statement variables to discern 4 key credit factors: Liquidity, Leverage, Profitability, and Size, to provide credit/liquidity analysis for over 370 public Cannabis/Hemp companies.
Weekly Credit Report – Cash Flow From Operations Never Lies, But It Doesn’t Always Tell the Whole Truth
- Many years ago, when I was in the Banker’s Trust credit training program, we were ceaselessly drilled to focus on Cash Flow From Operations. The reason is simple: it is a hard number that is invariant to most accounting manipulations. Change your depreciation method or life? It doesn’t matter; CFFO stays the same. Change your inventory accounting method? It doesn’t matter; CFFO stays the same. Change your revenue recognition policy? It doesn’t matter; CFFO stays the same. Etc.
- But as good a number as CFFO is, there are still many ways to skin the cat. Do you want to increase your cash flow from operations? It’s simple: just don’t pay your bills when they are due. Stretching your payables increases cash flow! And that includes tax payables.
- The graph below looks at the percentage of YTD 9/30/24 cash flow from operations for the big 10 MSO that comes from increases in accrued taxes. We include those fun new accounts called “uncertain tax positions,” which are almost always classified as long-term liabilities (daring the IRS to come collecting?)
- The graph shows that a substantial portion (averaging 60% for the group) of YTD cash flow from operations is produced by increased accrued taxes. In fact, for the three companies on the right, increased tax accruals account for more than 100% of cash flow from operations.
- Viridian takes these tax liabilities into account when we calculate adjusted net debt. We add any tax liabilities in excess of 90 days of tax expense as debt. These extra debts add to $1.25B for the companies on the chart.
- The MSOs are taking an early tax holiday by not paying their 280e taxes. This will, at best, blunt the benefits of 280e elimination. After all, if you aren’t paying the tax now, then you won’t save any when they tell you you don’t have to pay it. At worst, these amounts add to the substantial upcoming debt maturities in 2026.
- To be fair, large sums (millions?) have been spent on the best tax advice money can buy to justify not paying 280e taxes, and in the worst case, holding on to your cash longer is always a good thing. But they don’t call them “uncertain tax positions” for nothing.
Credit Tracker By Sector
Credit ratings are not currently available for public cannabis companies leaving companies, lenders and investors with a gap of information. The Viridian Cannabis Credit Tracker fills this gap. The model uses 11 market and financial statement variables to discern 4 key credit factors: Liquidity, Leverage, Profitability, and Size, to provide credit/liquidity analysis for over 370 public Cannabis/Hemp companies.
Weekly Sector Credit – Hemp
- The public hemp sector still doesn’t look very attractive from a credit point of view. This is probably due to the fact that the companies making zillions of $ selling d8 at gas stations are mainly private companies that don’t go into these metrics.
- Liquidity is low, with a median annualized free cash flow adjusted current ratio of .74x. Although that implies that the sector will need additional funding to dispatch its current liabilities, the number is actually pretty decent. It is the best stat of the twelve sectors we follow- a classic case of dammed with faint praise.
- Another relatively strong number is the median total liabilities to a market cap of 1.26x, which is stronger than most other sectors, including cultivation and retail.
- The bad news is the stubbornly negative funds from the operation to total assets, which is kind of an after-tax cash flow measure of profitability. Cultivation companies can point to 280e’s absurd tax rates for why cash flow is negative, but Hemp companies are technically legal under the farm bill and don’t have 280e to blame.
Weekly Sector Credit – Hemp
- The public hemp sector still doesn’t look very attractive from a credit point of view. This is probably due to the fact that the companies making zillions of $ selling d8 at gas stations are mainly private companies that don’t go into these metrics.
- Liquidity is low, with a median annualized free cash flow adjusted current ratio of .74x. Although that implies that the sector will need additional funding to dispatch its current liabilities, the number is actually pretty decent. It is the best stat of the twelve sectors we follow- a classic case of dammed with faint praise.
- Another relatively strong number is the median total liabilities to a market cap of 1.26x, which is stronger than most other sectors, including cultivation and retail.
- The bad news is the stubbornly negative funds from the operation to total assets, which is kind of an after-tax cash flow measure of profitability. Cultivation companies can point to 280e’s absurd tax rates for why cash flow is negative, but Hemp companies are technically legal under the farm bill and don’t have 280e to blame.
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