4 Of 5 Largest Canadian Cannabis LPs Have More Than A 50% Likelihood Of Going Bust

The most critical financial information on the health of a company is whether, or not, it has a Net Positive Operating Cash Flow; recent growth in its Net Operating Cash Flow; its Altman -Z Score; its Piotroski F-Score; and the percentage probability that it could go bankrupt within the next 2 years (definitions at end of article).

None of the 5 largest Canadian Licensed Producers have a Positive Net Operating Cash Flow and are ranked below as to their likelihood of Financial Distress within the next 2 years according to data from macroaxis.com as well as their stock performances year-to-date (February 24th), as follows:

  1. Cronos (CRON): DOWN 16.7% YTD
  2. OrganiGram (OGI): DOWN 3.8% YTD
  3. Canopy Growth (CGC): UP 2.6% YTD
  4. Tilray (TLRY): UP 5.6% YTD
  5. Aurora (ACB): DOWN 3.4% YTD

The 5 companies above are constituents in the munKNEE Canadian Cannabis LP Index which is now DOWN 2.96% YTD. In comparison, the munKNEE American Cannabis MSO Index is DOWN 2.99% while the publicly traded Global X Cannabis ETF (POTX), with 57% of its constituents Canadian LPs - the most of any ETF - is DOWN 3.95% YTD. 

Below are the definitions for Positive Net Operating Cash Flow, the Altman Z-Score, and the Piotroski F-Score:

  • Positive Net Operating Cash Flow:
    •  is money coming in through sales minus operating expenses and a company doesn't survive without it, as such, it is the best measure of a company’s financial and operational health.
  • The Altman Z-Score:
    • is a numerical measurement used to predict the chances of a business going bankrupt in the next two years compared to a company in a similar line of business and has an accuracy that ranges from 82% and 94%.
      • companies with Z-Scores above 3.1 are generally considered to be stable and healthy with a low probability of bankruptcy,
      • scores that fall between 1.8 and 3.1 lie in a so-called 'grey area' and
      • scores of less than 1 indicate a high probability of distress.
  • The Piotroski F-Score:
    • is a popular financial indicator that puts together nine criteria to evaluate the financial strength of a company based on its profitability, leverage, liquidity, source of funds, and operating efficiency.
      • scores of 8 and 9 are usually classified as strong-value stocks and
      • scores of 2 or below are considered weak value stocks.

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