Measuring Leverage in the Cannabis Industry
When it comes to evaluating Cannabis company leverage, the Debt/EBITDA ratio is often the first port of call. Yet, Viridian propagates a different beacon of clarity by asserting that Total Liabilities / Market Cap reigns superior in its valuation mettle. This metric, standing resilient against accounting manipulations, serves as a beacon that reflects the market’s estimation of asset value over liabilities with a perspicacious gaze keen on responding swiftly to any news that might sway investors’ outlook on company worth.
Redefining the Paradigm of Valuation Metrics
While some investors find solace in more traditional accounting-based measures, Viridian plumbs the depths of novel ratios within its Viridian Capital Credit Tracker model. Imbued with a sense of mission, this model integrates a fresh measure underscored by fundamental principles, contending that leases – which comprise a substantial chunk of many cannabis companies’ capital – ought to be viewed akin to debt. Unveiling a landscape where lease liabilities loom large, accounting for significant portions such as the 82% at Planet 13, 63% at 4Front, 47% at Green Thumb and Ascend, and 46% at Curaleaf, it becomes apparent that these financial obligations, entrenched in long-term permanence within “mission-critical” infrastructures, bear cross-default clauses intertwined with their essence. Thus, defaulting on a lease might not serve as a technical trigger for bankruptcy, but in a realm where cannabis companies stand bereft of bankruptcy shields, the stakes are starkly higher.
Capturing the Essence of Financial Realism
In the current milieu where some cannabis entities falter in tax payments, finding themselves essentially borrowing from the government at interest rates more favorable than those proffered by the commercial crucible, Viridian takes a radical stance. Any accrued tax liabilities surpassing a quarter of the tax expense are draped in the same cloak of debt, irrespective of the company’s own classification as current or long-term.
Viridian’s methodology unfurls with precision, calculating an adjusted net debt realm by adding leases and excess taxes into the debt cesspool prior to cash subtraction. However, amidst this intricate tapestry, the tentacles of operating lease payments constricting EBITDA beckon modifications. A fair reckoning emerges – leases not merely as plain debt but entwined with an EBITDA adjustment. Thus, Viridian forges ahead by incorporating lease expenses into EBITDA to yield the EBITDAR, contemplating a realm where analysts might not peer into future lease expenses, thereby necessitating an annualized projection based on recent quarterly rental trends.
Should not the conventional EV/EBITDA valuation metric find itself aligning with similar adjustments? Undoubtedly. Despite acknowledging and computing these staple ratios, Viridian finds merit in upholding a more sophisticated metric. Here, the Enterprise value unfolds by merging the adjusted net debt terrain with market cap, and it’s the EBITDA that plays the pivotal part in the numerator within the EV/EBTIDAR ratio, signifying a dimensional shift towards a domain emblematic of financial heft.
Unveiling Financial Realities Through Baseline Values
The graphical depiction showcases foundational values for the newfound leverage and valuation metrics, illuminating a vista where the inclusion of leases and tax nuances oftentimes scales up the rungs of leverage and valuation metrics. In the ensuing week’s tracker delve, a probing expedition will discern the relative echelons impacted by both these metrics, painting a portrait more attuned to the pulsating beats of financial reality.
The Viridian Capital Chart of the Week stands as a lodestar, shedding light on cardinal investment, valuation, and M&A trends distilled from the Viridian Cannabis Deal Tracker.
The Viridian Cannabis Deal Tracker emanates as a wellspring of market intelligence, offering a compass for cannabis companies, investors, and acquirers navigating through capital allocation and M&A strategy terrains. This proprietary service diligently monitors capital raise and M&A movements swirling within the legal cannabis, CBD, and psychedelics spheres. Each week, the Tracker gathers, synthesizes, and dissects all sealed deals, segregating them based on crucial metrics.
From Industry Sector-based deals to the fabric of Deal Structures, from principal architects comprising Issuers, Investors, Lenders, and Acquirers to the tapestry of Financial Metrics and Geographic Shenanigans, the Tracker weaves a compendium of capital flow fine points.
Since its inception back in 2015, the Viridian Cannabis Deal Tracker has stood as a bastion, meticulously tracking and dissecting over 2,500 capital raises and 1,000 M&A transactions, summing up an impressive tally of over $50 billion in aggregate worth.
Authorship: This article is a contribution from an external oracle. It does not echo the sentiments of Benzinga and has been presented verbatim without tampering.
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