When it comes to assessing the leverage of Cannabis companies, the debate rages on: what’s the most accurate measuring stick? While Debt/EBITDA is often seen as the go-to metric, Viridian brings a fresh perspective by endorsing Total Liabilities / Market Cap as the gold standard valuation measure. This metric offers a real-time reflection of the market’s perception of asset value minus liabilities, immune to accounting shenanigans and highly responsive to market sentiment shifts.
While some investors lean towards accounting-based measures, Viridian incorporates these ratios into their Viridian Capital Credit Tracker model. They are now tweaking the model to include a new metric guided by key principles.
Consider this: leases form a substantial chunk of the capital structure for many cannabis firms and should be viewed as debt. Lease liabilities represent a significant portion of the combined debt and leases for players like Planet 13 (PLNH), 4Front (FFNTF), Green Thumb (GTII), Ascend (AAWH), and Curaleaf (CURLF). These obligations, secured by crucial facilities, often come with cross-default clauses, with default potentially sidestepping bankruptcy protection.
Cannabis firms have been skirting tax payments, effectively borrowing from the government at rates more favorable than market offerings. Viridian treats tax liabilities exceeding a quarter of tax expense as debt, regardless of the company’s current or long-term classification.
To arrive at adjusted net debt, Viridian factors in leases and excess taxes before deducting cash. However, to level the playing field, they also add lease expenses to EBITDA, producing EBITDAR. Recognizing that lease expenses eat into EBITDA, Viridian annualizes the most recent quarterly rent in estimations.
It’s only fair that the standard EV/EBITDA valuation metric be tweaked in a similar vein, right? Viridian thinks so. Besides the standard ratios, they advocate for a more nuanced approach. Their method involves calculating Enterprise Value by blending the adjusted net debt metric with market cap, using EBITDA as the denominator in the EV/EBITDAR ratio.
The graph reveals the baseline values for these novel leverage and valuation metrics. By factoring in leases and taxes, the resulting metrics typically paint a rosier (or grimmer) financial picture. In the upcoming tracker, Viridian will delve into how these metrics impact leverage and valuation metrics, offering a truer reflection of financial health.
The Viridian Capital Chart of the Week dissects pivotal investment, valuation, and M&A trends extracted from the Viridian Cannabis Deal Tracker.
The Viridian Cannabis Deal Tracker, a treasure trove of market intelligence for cannabis entities, investors, and acquirers, aids in making well-informed decisions on capital allocation and M&A strategy. This proprietary service closely monitors capital raises and M&A activities across the legal cannabis, CBD, and psychedelics sectors. Each week, the Tracker crunches closed deals, categorizing them based on essential metrics:
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Sector-specific Deals (tracking capital flow and M&A activities across 12 sectors, from Cultivation to Brands to Software)
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Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A), Company Status (Public vs. Private)
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Transaction Principals (Issuer/Investor/Lender/Acquirer), Key Deal Terms (Pricing and Valuation)
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Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
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Issuer/Buyer/Seller Location (tracking capital flow and M&A activities by State and Country)
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Credit Ratings (Leverage and Liquidity Ratios)
Since its inception in 2015, the Viridian Cannabis Deal Tracker has meticulously analyzed over 2,500 capital raises and 1,000 M&A transactions, amassing a total value exceeding $50 billion.
The insightful analysis detailed above dives deep into the metrics shaping the landscape for Cannabis MSOs, offering investors a clearer lens into the financial health and valuation landscape of these burgeoning firms.
