Should investors be worried? – The crazy fool

Debt has not been a major problem for many marijuana companies. The reason is simple: banks do not lend them money.

But it is becoming easier for marijuana companies to get loans. And some companies whose main business does not belong to the cannabis industry went into debt to make acquisitions before taking the marijuana train.

Which marijuana stocks are the most heavily indebted? And should investors be worried about any of them?

The largest debtors

The five companies that operate in the marijuana sector and currently have the highest level of long-term debt are:

Data Sources: YCharts; regulatory filings and company press releases.

Constellation Brands is by far the largest debtor. The company is also the newest of the five companies to enter the cannabis market. In 2017, the manufacturer of alcoholic beverages bought a 9.9% stake in Cover growth. Constellation increased its stake in Canopy to 38% last year with an additional investment of $ 4 billion.

Scotts Miracle-Gro is a distant second on our list. The company has a long history in the field of garden and lawn products. But Scotts began to take on more debt several years ago to acquire suppliers to the American cannabis industry.

The next three companies on the list are Canadian marijuana growers. Aurora Cannabis has the highest debt level of this group, with the issuance of convertible senior notes of an amount of $ 345 million in January 2019, which adds to a debt of nearly $ 254 million at the end of 2018.

Tilray is also heavily indebted thanks to its $ 450 million convertible bond offering in October 2018. Aphria's total debt is well below that of Aurora and New York. Tilray. However, Aphria recently announced plans to offer $ 300 million of convertible senior bonds.

More important factors

In terms of debt, there is something much more important than the amount that a company should: the ability of the company to repay its debt. Suppose, for example, you owe $ 100,000 and your friend has a million. If you only earn $ 30,000 a year and your friend earns $ 2 million a year, your debt is much more of a concern than your friend's because you will have more trouble paying down your debt.

Constellation achieved a turnover of $ 8.1 billion last year. Scotts Miracle-Gro generated $ 2.7 billion in revenue in its most recent year. On the basis of these figures, the indebtedness of the two companies does not seem too worrying.

Of course, Constellation and Scotts' profits were significantly lower at $ 3.4 billion and $ 63.7 million, respectively. But both companies should still be able to repay their debt relatively easily.

What about Aurora, Tilray and Aphria? The numbers seem a lot more scary. None of the marijuana growers have been profitable during the last quarter indicated. With continuing losses, companies may have to incur additional debt to finance their operations or issue more shares, which would dilute the value of existing shares. This is not an attractive scenario either.

No problem?

Investors probably do not need to worry at the moment about Aurora, Tilray and Aphria. Sales skyrocket for the three companies. Aphria thinks it's possible that revenues will reach 500 million Canadian dollars (about 375 million US dollars) this year and double that amount in 2020. Aurora and Tilray could also continue to benefit from exceptional growth of their income.

But there are risks. An analyst has already reduced revenue estimates for Canopy Growth due to concerns that could affect Aurora, Tilray and Aphria. Canada may not launch the market for cannabis-based edible products as quickly as many expect. International markets for medical cannabis may take longer than expected. If these scenarios materialize, it is possible that Canadian producers of highly indebted marijuana face problems.