uploads/2019/10/Aurora-cannabis-1.jpeg

Aurora Cannabis: Why Investors Must Watch Its Debt

By

Updated

Aurora Cannabis (ACB) has positioned itself as a strong marijuana stock. Currently, Aurora has a market capitalization of $3.8 billion. However, its increasing debt load is becoming a concern. Why should investors keep an eye on its debt?

Article continues below advertisement

Aurora Cannabis’ rising debt load

To become a prominent player in the cannabis space, a company needs to expand in this evolving industry. Although Aurora Cannabis is expanding, this action also increases its debt load. Currently, the company carries net debt of 328.8 million Canadian dollars (or $250 million).

Comparatively, its peer Canopy Growth (CGC) (WEED) has net cash of $740 million on its balance sheet. Canopy is backed by Constellation Brands (STZ), which has a huge investment in the company. So, it appears that Canopy Growth can afford to spend on growth and expansion plans.

CGC has been focusing on achieving its target of 1 billion Canadian dollars in sales in fiscal 2020. To learn more, please read Canopy Growth: Is $1 Billion in Sales Still Possible? Additionally, Hexo (HEXO) has net cash of $105 million on a very small debt load.

Aurora Cannabis’ fundamentals

Aurora Cannabis failed to impress in its fourth-quarter earnings. It missed its revenue guidance of 100 million–107 million Canadian dollars. However, it reported a 52% increase in revenue to 98.9 million Canadian dollars year-over-year. It also missed analysts’ estimates of 108.2 million Canadian dollars. The company also reported negative EBITDA of 11.7 million Canadian dollars.

An August 26 Investors’ Place noted that analysts are concerned about the company’s spending levels. However, analysts praise ACB’s expansion of its medical cannabis industry into Europe and achieved higher medical sales with higher margins. However, they worry that the medical cannabis market could take time to show its full potential. As a result, ACB cannot cash in this benefit sooner.

Another major concern that analysts discussed was that in its first quarter of fiscal 2020, Aurora Cannabis would have to pay 230 million Canadian dollars in convertible debt. Already burdened with debt, the company would pay this out in cash, which would impact its already declining share price.

Article continues below advertisement

Aurora’s stock price

Aurora Cannabis’ weaker results have taken a toll on its share price. Year-to-date, the stock has declined by 25%. In October so far, the stock has fallen 15.2%. Meanwhile, Canopy Growth has declined 5.5% while Hexo has fallen 36.3% in October.

Currently, ACB stock has a majority “hold” rating with a target price of 8.3 Canadian dollars. It represents an upside potential of 67% from its current trading price. CGC stock has a majority “hold” rating with a target price of 9 Canadian dollars. Hexo has a majority “buy” rating despite its recent problems.

Financing for cannabis companies

Obtaining financing is a concern for cannabis players because of regulation issues. Marijuana has been legal in Canada since 2018. However, some small cannabis companies face pressure in obtaining financing. The bigger players can still afford to get financing by leveraging their assets. However, banks hesitate to lend to smaller cannabis companies.

In the US, it is more challenging to obtain financing, as weed is illegal on the federal level. However, with the passage of the SAFE Act, this problem could be solved for cannabis growers.

Moreover, cannabis stocks already face pressure from black market sales. The absence of stricter regulations is the reason, and it seems that everyone is optimistic about Cannabis 2.0. It appears that more demand for edibles could help increase revenue for cannabis companies, including Aurora Cannabis.

Additionally, the company signed a sublicensing agreement with EnWave. However, many analysts are still doubtful that the cannabis sector could see revenue growth in fiscal 2020. Investors need to keep an eye on Aurora’s debt, which could put pressure on the company’s profitability and stock price.

The upcoming earnings for Aurora Cannabis, Canopy Growth, and Hexo should reveal where the companies stand with respect to profitability. Aurora Cannabis and Canopy Growth plan to report their earnings next month. Hexo plans to release its earnings on October 28.

For more cannabis-related news and updates, visit 420 Investor Daily.

Advertisement

More From Market Realist