When assessing the financial health of cannabis companies, the standard measure of leverage is Debt/EBITDA. However, Viridian Capital believes this metric falls short, and proposes a more comprehensive approach that accurately reflects the market’s perception of a company’s value.
Viridian argues that Total Liabilities / Market Cap is a superior metric. This ratio captures the market’s estimation of the asset value exceeding liabilities, remaining immune to accounting manipulations and responding instantly to news that affects investor sentiment. While some investors prefer accounting-based measures, Viridian incorporates these ratios into its Capital Credit Tracker model.
But Viridian goes further, incorporating crucial elements often overlooked in traditional metrics:
1. Lease Liabilities:
Leases form a substantial portion of capital for many cannabis companies and should be treated as debt. These long-term fixed obligations, often on critical facilities, contain cross-default clauses that link them to other financial obligations. Defaulting on a lease may not trigger bankruptcy, but cannabis companies lack the bankruptcy protections available to other industries.2. Accrued Tax Liabilities:
Many cannabis companies face challenges in paying taxes, essentially borrowing from the government. Viridian considers accrued tax liabilities exceeding one-quarter of tax expense as debt, regardless of whether they are classified as current or long-term.3. Adjusted Net Debt:
By adding leases and excess taxes to total debt before subtracting cash, Viridian calculates adjusted net debt. Since operating lease payments reduce EBITDA, Viridian also adjusts EBITDA by adding lease expenses to calculate EBITDAR. This provides a more accurate picture of the company’s actual operating performance.4. EV/EBTIDAR:
Viridian uses a sophisticated Enterprise Value (EV) metric calculated by adding adjusted net debt to market cap. This EV is then divided by EBITDAR to create an EV/EBTIDAR ratio, providing a more comprehensive valuation measure.The inclusion of leases and taxes in these adjusted metrics often results in higher leverage and valuation figures. This week’s Viridian Capital Credit Tracker will explore the impact of these metrics on both leverage and valuation, providing a more realistic understanding of financial realities in the cannabis sector.
The Viridian Cannabis Deal Tracker:
The Viridian Cannabis Deal Tracker is a powerful tool for investors, companies, and acquirers in the cannabis, CBD, and psychedelics industries. This proprietary service provides market intelligence through a comprehensive analysis of capital raises and M&A transactions. The Tracker meticulously segments deals based on key metrics like industry sector, deal structure, company status, deal terms, and location. Since its inception in 2015, the Tracker has analyzed over 2,500 capital raises and 1,000 M&A transactions, totaling over $50 billion in aggregate value.By adopting a more comprehensive approach to measuring leverage and valuation, Viridian provides investors with a clearer understanding of the financial landscape within the cannabis industry. These insights are essential for making informed investment decisions in a rapidly evolving market.
