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Can Aphria Inc. (TSX:APH) Live Up to its True Potential?

Canadian marijuana stocks are bracing for an exciting year. It’s the first time producers can start selling recreational marijuana directly to consumers. In anticipation, the largest producers have all issued equity, raised capital, and invested in production facilities to boost capacity.

One of the top three players is Leamington, Ontario-based Aphria (TSX:APH). The company seems well positioned to carve out a chunk of the growing market for medical and recreational cannabis, not just in Canada but across the world.

Aphria already has access to over 12 countries. This includes a subsidiary in Australia that covers the pan-Asian market, operations in Lesotho that offer access to the African continent, and assets in Latin America. The two most interesting markets from Aphria’s roster are Germany and the United States.

CEO Vic Neufeld has mentioned his ambitions to position the company as a dominant player in Germany, where he expects the medical marijuana market to be multiple times larger than the domestic market in Canada. Meanwhile, the United States is, and is likely to remain, the largest consumer of both medical and recreational cannabis in the world.

The Aphria team has spent much of the past few years consolidating its position in Canada. With annual production expected to reach 255,000 kgs by the end of 2019 and a sales agreement with Great North Distributors that offers access to over 99% of Canada’s consumer market, Aphria is clearly competing against the likes of Aurora Cannabis and Canopy Growth Corp a position of strength.

There’s no doubt the competition for this market is going to intensify, as the market price stabilizes, supply chains mature, and the regulatory frameworks in different parts of the world are fine-tuned. To survive the next few turbulent years, producers need a strong balance sheet, a durable supply network, and some sort of competitive edge.

Aphria seems to tick all the boxes. It’s holding on to over $350 million in what the company calls “deployable assets.” These assets include cash, cash equivalents, and marketable securities, but the bulk (nearly $319 million) comes from the recent bought deal financing. In other words, Aphria sold stock just as the market was inflating to historic highs. Meanwhile, the company’s debt-to-equity ratio is barely 0.058 times.

Management’s decisions to raise capital at the right time and keep debt negligible is a smart move and augurs well for future growth. Aphria now has access to all the important markets and continues to invest in boosting production through its Aphria One project.

At the same time, the company understands the range of products that can use marijuana as an enhancing ingredient. It already offers edibles, concentrates, vapes, and softgel capsules that were developed in-house. Going forward, research partnerships with over 10 Canadian universities should enhance the company’s intellectual property.

In my opinion, Aphria’s strong fundamentals and unique partnerships reflect something more than just a competitive advantage. It shows management’s ability to navigate this market with finesse. This pragmatic leadership style should help the company live up to its own ambitions and true potential.

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Fool contributor Vishesh Raisinghani has no positions in the companies mentioned.

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