- Data from CreditRiskMonitor shows the risk of bankruptcy for major cannabis companies.
- The system evaluates each company using financial metrics and other inputs.
- Cannabis companies have generally seen their financial situations improve over the past year.
- See more stories on Insider’s business page.
Cannabis companies that survived a tumultuous 2019 and 2020 are seeing their fortunes improve.
Cannabis stocks have been on a tear, rewarding many companies that diligently managed the cannabis crash in 2019 and the onslaught of the COVID-19 pandemic. Investors have become increasingly optimistic on the sector as more US states moved to legalize marijuana and after Democrats took control of the US Congress and presidency.
Since November, the Bloomberg Intelligence Global Cannabis Competitive Peers Index, an index that tracks cannabis stocks, has nearly doubled.
Insider analyzed data on 13 of the largest US and Canadian plant-touching cannabis companies by market value from financial risk analysis firm CreditRiskMonitor to evaluate their likelihood of bankruptcy within the next year.
Eleven out of the 13 companies had reduced their odds of bankruptcy over the past 12 months, as investors returned to the sector, new state markets opened up, and cannabis companies shored up their balance sheets by raising more capital.
Only one company, MedMen, saw its odds of bankruptcy in the next year increase.
CreditRiskMonitor grades companies on a 10-point scale called the FRISK Score, which is calculated based on four components, Brian Sanders, a senior research analyst at CreditRiskMonitor said.
Those four components are: stock market performance, financial statements, bond agency ratings, and subscriber crowdsourcing, which tracks how CreditRiskMonitor’s over 1,700 clients view and interact with data from each company, Sanders said.
CreditRiskMonitor told Insider that most mature industries average a score of 6, which is slightly under a 1% probability of bankruptcy over the next twelve months. A grade of 1, the lowest score, indicates a 9.99% to 50% probability of bankruptcy within 12 months, while a 10 demonstrates a chance of 0.12% or lower.
The 13 cannabis companies Insider analyzed have an average score of 5.8, which indicates a higher risk of bankruptcy than average. But their financial situation has improved over time, likely thanks to the sector’s strong stock-market performance, Sanders said.
Investors should view a score of 5 or below as a “red flag,” CreditRiskMonitor says.
US cannabis companies can’t file for federal bankruptcy, leaving few good options
We should note that most US cannabis companies can’t actually file for bankruptcy, since cannabis is federally illegal.
Struggling cannabis companies have alternatives to bankruptcy: they can raise capital at a reduced valuation, negotiate with creditors to convert some of their liabilities into equity, negotiate with lenders to extend their liabilities, or bring in a third party to help liquidate assets, said Marc Hauser, an attorney at Reed Smith and co-chair of the firm’s cannabis law group.
However, as more states legalize cannabis, that’s provided opportunities for struggling operators to sell their infrastructure and licenses — especially in lucrative states like Arizona, New Jersey, and New York — and for more financially stable companies to swoop in.
Read on to see the bankruptcy-risk scores of the top 13 cannabis companies by market value:
Leave a Reply
Leave a Reply
This site uses Akismet to reduce spam. Learn how your comment data is processed.
