Canopy Growth (CGC 2.41%) has been scaling back its operations to contain its cash burn. It's no longer funding its BioSteel nutritional supplement line. It recently sold its facility in Smiths Falls, Ontario, which previously served as its headquarters. The company is getting smaller and leaner. But the problem is that the cash burn still continues. Will Canopy Growth end up running out of money, and what would that mean for investors?
Current assets are a fraction of what they were four years ago
Beer maker Constellation Brands announced a $4 billion investment in Canopy Growth back in 2018. This provided the company with plenty of cash to help fund its operations and bring aboard a partner, which would make Canopy Growth seem like a safer pot stock to invest in than its peers.
But over the years, with Canopy Growth's cannabis business stumbling, the company's current assets, which include cash and short-term investments, have deteriorated sharply.
Data source: YCharts
The company is still well equipped to cover its near-term liabilities, with Canopy Growth reporting current liabilities totaling 451.2 million Canadian dollars ($329 million) as of June 30. But the key number for investors to watch is the company's cash burn.
Cash burn remains high
Over a 12-month period, Canopy Growth has been burning through more than $400 million in cash over the course of its day-to-day operations (this doesn't include investing in growth opportunities and capital expenditures). If it remains on that pace, it could be less than two years before the company depletes its current assets.
Data source: YCharts
What can improve this, however, is Canopy Growth's plan to stop funding BioSteel, as the troubled sports nutrition business has been a significant drag on Canopy Growth's financials and a cash drain. Presumably, such a move means that the rate of cash burn should slow, which could let the money that Canopy Growth has on its books last longer.
What happens if Canopy Growth runs out of cash?
Canopy Growth isn't generating positive cash flow and unless that changes, odds are it will run out of cash sooner or later. And in August, when it last reported earnings, it said that it will need to raise funds to meet its obligations as it alerted investors to its going concern risk, which is the possibility that it may not be able to survive.
But that doesn't mean Canopy Growth is going out of business, at least not yet. In all likelihood, it'll just need to raise more cash, either through debt or the equity markets. One of the benefits of having ample cash on hand or not burning through it is that can result in a company not having to issue shares. That's a good thing for investors because it means less risk of dilution and less downward pressure on the share price (more shares available on the market often leads to a lower price).
Over the years, Canopy Growth has been a less dilutive pot stock than its peers, but that could change as its current assets deplete and the company needs to raise cash.
Data spurce: YCharts
Canopy Growth's stock is volatile and risky
Even if Canopy Growth slows its cash burn by dumping BioSteel, it still has a long way to go to prove to investors that its operations are sustainable and that the stock is a viable investment. The stock is highly volatile; while it can rise significantly if marijuana legalization in the U.S. seems like it's coming, that's not a scenario that investors should count on. And even if the U.S. pot market opened up tomorrow, Canopy Growth would still need strong financials to support those growth initiatives.
Unless the company dramatically turns around its operations, becomes profitable, and generates positive cash flow, investors should avoid the stock. There are much better growth stocks out there for investors to buy.
