- Data from CreditRiskMonitor shows the risk of bankruptcy for major cannabis companies.
- The system evaluates each company using financial metrics and other inputs.
- Five cannabis companies scored a 5 or lower, indicating they’re in the “red zone” for bankruptcy risk.
- See more stories on Insider’s business page.
Cannabis companies that survived a tumultuous 2019 and 2020 are seeing their fortunes improve.
But some cannabis companies still find themselves in a precarious position, despite the influx of new investors and favorable legislation.
Insider analyzed the risk of bankruptcy for 13 of the largest US and Canadian plant-touching cannabis companies. We evaluated the risk using information from the financial risk analysis firm CreditRiskMonitor.
CreditRiskMonitor grades companies on a 10-point scale called the FRISK Score. A score of 10 indicates the lowest risk of bankruptcy within the next year, while a score of 1 indicates the highest risk.
Five companies received a score of 5 or below — the “red zone“, according to CreditRiskMonitor. A score of 5 or below indicates a bankruptcy risk of at least 0.87% in the next 12 months.
The score is calculated based on four components: 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, Brian Sanders, a senior research analyst at CreditRiskMonitor said.
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 told Insider that most mature industries average a score of 6.
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.