Canopy growth (NASDAQ: CGC) made great efforts to be accountable. Over the past few years, the Canadian cannabis company has significantly reduced its outstanding debt. It also accumulated a lot of money.
Yet while Canopy has less debt and is more liquid than ever, this recapitalization has come at the cost of a share reduction. Worse, while the balance sheet has improved, profitability, even on an EBITDA (earnings before interest, taxes, depreciation, and amortization) basis, remains difficult. With this, uncertainty is high, but the latest merger could change the story of Canopy, still one of the most followed marijuana stocks.
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Canopy and its continuous dilution spiral
Over the past five years, shares of Canopy Growth have fallen more than 99.5%. In other words, a $10,000 investment made in May 2021 would be worth less than $50 today. The main reason for this massive destruction of shareholder value was the company’s continued loss, coupled with Canopy’s use of financing to pay for it.
Even as the losses narrowed, Canopy continued to tap the stock markets, cleaning up the stock’s fundamental value. The last capital increase took place last August. That’s when Canopy Growth raised $200 million through an equity in the market (ATM).
Canopy issued new shares and sold them on the open market. Again, this may have strengthened the balance sheet, but resulted in greater losses for existing shareholders.
What would change the story?
Sometimes, a share dilution may be appropriate if the money is used to improve the company’s core operations. Yet while Canopy Growth has stabilized losses, the company is still struggling to reach profitability, even on an EBITDA basis.
That said, all of this could change soon, and not just because of possible external motivations such as US federal approval. Last March, Canopy completed its acquisition of MTL Cannabis. This combination could create millions in operating cost savings.
Canopy also plans to use MTL’s production capacity to meet international demand for medical marijuana. Still, it may seem best to sit on the sidelines until Canopy’s next quarterly earnings are released on May 29. On that day, the company could reveal better-than-expected results and provide more guidance on its profitability path.
Should you buy stock in Canopy Growth right now?
Before buying stock in Canopy Growth, consider the following:
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Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a policy of disclosure.
Is Canopy Growth Stock Finally Preparing for a Real Turnaround? was first published by The Motley Fool
