But recently, Aphria made losses of CAD 7.9 million in its most recent quarter. So its profitability is still in doubt. In addition, profitability for six months decreased significantly from the previous year.
In other words, Aphria is going in the wrong direction when it comes to profitability.
Questions about the regulatory burden
The Canadian cannabis market concludes that Ontario, the country’s most populous province, has only 24 stores. These outlets must serve nearly 14 million Ontario citizens who can potentially buy weeds.
But there are only 37 million Canadians. So the math just doesn’t get any better. It is estimated that 75% of cannabis sold in Canada is on the black market.
The issue seems to be its regulatory burden. There are simply not enough stores that are approved to sell cannabis, especially in Ontario. (And the people of the eastern provinces are having a hard time simply getting out of the house this winter.)
If there are not enough places to sell your product, you can not simply increase sales fast enough to become seriously profitable.
Cash flow problems continue
Aphria has a pretty good balance sheet. It has CAD 497 million in cash on its balance sheet. This makes it possible to cope with further financial losses.
For example, Aphria had operating cash flows of CAD 71 million during the six months ending November. However, after capex expenditure of CAD 66 million, its free cash flow was negative CAD 137 million. It is a free cash flow of approximately CAD 284 million on an annual basis.
This means that its cash can take almost another year and a half (ie CAD 284 million + CAD 497 million – CAD 284 million) divided by CAD 497 million = 1.43 years or about 17 months).
To make matters worse, however, Aphria has CAD 140 million in bank and long-term liabilities, plus an additional CAD 358 million in convertible debenture loans. These are all interest-bearing liabilities.
The conclusion is that Aphria will need to become profitable quickly or otherwise acquire more dilutive shares or interest-bearing liabilities at some point in the next year.
If that happens, Aphria shares may not be able to withstand further losses or debts without further losses.
Lack of profitability weight on the Aphria stock
If the company has to cope with further financial losses, it may not be able to stay within this trading range. After all, its market value assumes that profitability will come sooner rather than later.
For example, if the company can only earn CAD 17 million next year, the market value should not be close to CAD 1.7 billion. It is likely to decrease by at least another 50% or more.
So look at the company’s earnings report for the fiscal quarter ending in February. This is likely to come out sometime in late March or April. It will show if Aphria is on track to regain profitability.
If that happens, the Aphria share will have a chance to rise or at least maintain its current valuation.
At the time of writing, Mark Hake, CFA holds no position in any of the above securities. Mark Hake runs the Total Yield Value Guide which you can review here. The guide focuses on high total return values. Subscribers a two-week free trial.