Understanding Cannabis Company Valuation and Leverage Metrics
Understanding Cannabis Company Valuation and Leverage Metrics
Measuring the financial health of cannabis companies is a challenging yet essential task for investors and analysts alike. While the common approach points to the Debt/EBITDA ratio, there's growing insight from firms like Viridian that suggest Total Liabilities / Market Cap could offer a clearer picture.
Choosing the Right Metric
Choosing the right metric to measure cannabis company leverage is crucial. Total Liabilities / Market Cap effectively indicates how the market values the assets over liabilities. This approach sidesteps the usual accounting manipulations associated with more traditional metrics, quickly reflecting any shifts in investor sentiment.
The Role of Accounting Ratios
Despite the valuable insights from market-based ratios, many investors prefer more conventional, accounting-based measures. In response to this demand, Viridian integrates various metrics into its Capital Credit Tracker model, allowing for a more comprehensive analysis of cannabis companies' leverage.
The Impact of Lease Liabilities
Lease liabilities are often substantial for cannabis firms, constituting a significant portion of their total capital. For instance, lease liabilities represent 82% of the total debt at Planet 13, 63% at 4Front, 47% at Green Thumb, and 46% at Curaleaf. These represent long-term commitments that significantly affect the financial landscape of these companies.
Tax Liabilities as Debt
Another layer of complexity arises from the tax obligations cannabis companies face. Many find themselves unable to meet their tax obligations, effectively borrowing from the government. Viridian recognizes tax liabilities exceeding 25% of a company's tax expenses as debt, regardless of how they are classified.
Calculating Adjusted Net Debt
In refining the evaluation process, Viridian calculates adjusted net debt by incorporating lease obligations and excess tax liabilities into the total debt. This offers a clearer financial picture, crucial for sound investment decisions.
Adjusting EBITDA for Lease Payments
Since operating lease payments deduct from EBITDA, it is necessary to adjust EBITDA to account for the inclusion of leases as debt. This adjustment forms the basis of the EBITDAR metric.
Proposing Enhanced Valuation Metrics
With this understanding, one must question whether the standard EV/EBITDA valuation metric should be adapted similarly. While Viridian employs the traditional ratio in its assessments, the inclusion of new metrics can offer a deeper understanding of company performance.
Insights from the Graph
The associated graphs outline baseline values for these newly proposed leverage and valuation metrics. By including lease and tax obligations in evaluations, the overall leverage and valuation metrics often appear elevated, painting a more realistic picture of financial health.
Trends in Investment and M&A Activity
The Viridian Chart of the Week serves as a critical resource, highlighting key trends in investment, valuation, and mergers and acquisitions within the cannabis industry. It compiles essential data that allows industry stakeholders to make informed choices regarding capital allocation.
The Importance of Market Intelligence
Through the Viridian Cannabis Deal Tracker, valuable market intelligence is provided for companies, investors, and acquirers. This resource has monitored over 2,500 capital raises and more than 1,000 M&A transactions, showcasing an impressive total exceeding $50 billion.
Frequently Asked Questions
What metrics should investors focus on for cannabis companies?
Investors should consider metrics like Total Liabilities / Market Cap and adjusted net debt for a clearer view of financial health.
How significant are lease liabilities in the cannabis industry?
Lease liabilities often form a large portion of a cannabis company's capital structure, impacting overall debt levels significantly.
Can tax liabilities be considered as part of debt?
Yes, accrued tax liabilities that exceed 25% of a company's tax expenses are considered debt by Viridian.
What is the purpose of the Viridian Cannabis Deal Tracker?
The Tracker provides essential insights into investment, valuation, and acquisition trends in the cannabis sector, assisting stakeholders in decision-making.
How does the adjusted EBITDA affect valuation?
Adjusting EBITDA for lease payments creates a more representative operating performance metric, influencing overall company valuation.
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