Redefining Cannabis Company Leverage

When it comes to evaluating the leverage of Cannabis companies, the Debt/EBITDA ratio is the conventional method. However, Viridian suggests a more insightful metric – Total Liabilities / Market Cap. This metric captures the market’s perception of asset value above liabilities, free from accounting manipulations and responsive to shifts in investors’ valuation.

Integration of Essential Metrics

While some investors prefer accounting-based indicators, Viridian incorporates a range of ratios in their model, including a new measure based on key principles. Notably, leases are a significant component of many cannabis companies’ capital and should be viewed as debt, along with considering accrued tax liabilities exceeding one-quarter of tax expense.

Adjusting Net Debt and EBITDA

To refine the assessment, Viridian computes adjusted net debt by incorporating leases and excess taxes into total debt before deducting cash. Furthermore, to balance the impact of operating lease payments on EBITDA, lease expenses are added to calculate EBITDAR.

Advance in Valuation Metrics

It is imperative to modify the standard EV/EBITDA metric by including adjusted net debt. Viridian’s approach adds this measure to market cap to compute Enterprise value and utilizes EBITDA in the EV/EBTIDAR ratio for a comprehensive valuation.

Visual Representation and Interpretation

The graph illustrates the foundation of the new leverage and valuation metrics, demonstrating higher values due to the inclusion of leases and taxes. Such adjustments paint a more accurate picture of the financial standing of cannabis companies.

Insights from the Viridian Capital Chart of the Week

The Viridian Cannabis Deal Tracker delves into crucial investment, valuation, and M&A trends derived from the industry. This data-driven analysis provides valuable insights for stakeholders navigating capital allocation and strategic decisions.

About the Viridian Cannabis Deal Tracker

Since 2015, the Viridian Cannabis Deal Tracker has meticulously monitored over 2,500 capital raises and 1,000 M&A transactions in the cannabis, CBD, and psychedelics sectors, totaling a staggering $50 billion in value. This proprietary service offers in-depth intelligence for informed decision-making.