It's been an up-and-down year for companies across all sectors of the stock market. The volatility has been keenly felt by cannabis companies, which were severely wounded by retail closures, interruptions in supply chains, and general economic uncertainty due to the COVID-19 pandemic.

Cronos Group's (CRON -0.62%) viability as a buy-and-hold investment has long been in doubt. Strapped with debt and a hemorrhaging balance sheet, shares of the Canadian cannabinoid company have fallen by more than 53% from where the stock was trading just 12 months ago. Despite its financial troubles, the company is extremely popular with Robinhood investors, probably due to its cheap share price. On Sept. 16, the stock closed at just $5.40.

But a cheap share price is not always a signal of a great stock. Here's what you need to know before you hit the "buy" button on Cronos Group.

person holding cannabis buds against background of marijuana plant

Image source: Getty Images.

The company's earnings don't tell the whole story 

At first glance, Cronos' revenue growth shows promise. In the first and second quarters of this year, the company reported net revenues of $8.4 million and $9.9 million, respectively. These figures represented year-over-year revenue increases of $5.4 million and $2.2 million from the same quarters in 2019. Cronos Group closed the most recent quarter with more than $1.1 billion in cash and cash equivalents on its balance sheet.

Unfortunately, these numbers barely scratch the surface of the company's true financial situation. In the past two years alone, Cronos has reported abysmal operating losses -- $21.3 million in 2018 and a blistering $121.5 million in 2019.  

Cronos' financial situation hasn't improved in 2020. During the first and second quarters of the year, the company reported operating losses of approximately $45.1 million and $34.8 million. This means that in the first six months of 2020, Cronos reported total operating losses of nearly $80 million. Bear in mind that the company's first-half consolidated net revenues were only around $18.3 million. To add insult to injury, Cronos incurred massive inventory writedowns in both quarters ($8.0 million in Q1 and $3.1 million in Q2). This means that its gross profit margin in Q1 was only 18% ($1.5 million), while its gross margin in Q2 was 1% ($0.1 million).

Cronos' cash position is one of the very few bright spots on its balance sheet, but the company can't take credit for it. Tobacco maker Altria Group (MO 0.56%) acquired a 45% economic and voting interest in the company in March 2019, for which it invested $1.8 billion cash in Cronos. Considering that a very small portion of Cronos' current cash flow was generated by its organic operations, the fact that it has more than $247 million in outstanding liabilities left on its balance sheet is worrisome.

CRON Chart

CRON data by YCharts

The future isn't looking much brighter

Cronos Group has several big holdings in its portfolio. These include Peace Naturals, through which it manufactures and sells medical marijuana, as well as adult-use marijuana subsidiary Spinach and premium brand COVE.

Investors' hopes were high for Cronos' future growth when the company announced on Aug. 2, 2019 that it would acquire four operating subsidiaries from Redwood Holding Group. The transaction concluded on Sep. 5, 2019. In the company's press release announcing the completion of the acquisition, management stated that "the transaction provides Cronos Group with a leading U.S. hemp-based products platform, including hemp-derived cannabidiol (CBD) infused skincare and other consumer products that are sold online and through retail and hospitality partner channels..."

Given Cronos' financial woes, it's clear that this acquisition, which was intended to establish its presence in the U.S. hemp sector, hasn't yet had the positive effect on the company's top and bottom line that management hoped for. Part of this could be blamed on the COVID-19 pandemic, which the company acknowledges has affected operations this year. 

The hemp-derived cannabidiol (CBD) market was previously anticipated to achieve 30% domestic growth in 2020, but is now likely to experience just 14% growth in the U.S. according to cannabis market research firm Brightfield Group. With that being said, the ugly truth is that while Cronos Group may be able to attribute part of its dreadful financial situation to the adverse effects of the coronavirus, its balance sheet was in trouble long before the pandemic hit. 

Should you risk it? 

At the moment, there's not much to get excited about when evaluating Cronos Group as a potential buy. This isn't to say that the company couldn't regain solid ground over the next few years. If you already own shares of the company, it's a good idea to hold onto them for now. On the other hand, if you are considering adding Cronos to your basket of stocks, I'd hold off from joining the Robinhood hype. Until the company improves its financial fundamentals, Cronos is unlikely to provide much to investors in the way of growth prospects.