7 Questions to Ask before investing in TerrAscend

The TDR Three Key Takeaways regarding TerrAscend and Cannabis Industry:

1. TerrAscend’s revenue growth of 22.3% outpaces the cannabis industry average.
2. 50.1% gross margin demonstrates TerrAscend’s cost management in LTM.
3. TerrAscend’s stock price shows room for significant appreciation.

TerrAscend (TSX: TSND, OTCQX: TSNDF) is a multi-state operator in the cannabis sector. TerrAscend runs 38 dispensaries across five U.S. states—California, Pennsylvania, Michigan, Maryland, and New Jersey—and maintains a retail presence in Canada. Its vertically integrated business model encompasses seven U.S. cultivation and production facilities, ensuring stringent quality control and operational efficiency. For potential investors, understanding the company’s financial health and growth prospects is important. Here are seven essential questions to consider before investing in the company.

Question to Ask #1: Revenue Growth of TerrAscend
TerrAscend has shown revenue growth, distinguishing itself in a competitive market. Over the last 12 months, the company reported a revenue growth rate of 22.3%, significantly higher than the industry average. This growth is particularly noteworthy given the general slowdown in revenue growth across the cannabis sector. The company’s ability to maintain such high growth rates underscores its strong market position and operational efficiency.

Question to Ask #2: Gross Margins  of TerrAscend
TerrAscend leads its peers with a gross margin of 50.1%, surpassing the industry benchmark. Moreover, the company has improved its gross margins by 5.9% over the last year, while many competitors experienced a decline. This improvement highlights TerrAscend’s efficient production processes and cost management strategies, positioning it favorably in the market.

Question to Ask #3: SG&A  of TerrAscend
Selling, General, and Administrative (SG&A) expenses are a significant factor in assessing a company’s operational efficiency. The company has excelled in this area by reducing its SG&A expenses by 10.2% over the past year, bringing the ratio to 35.1%. This reduction indicates the company’s commitment to maintaining lean operations and controlling costs, which is vital for sustaining profitability in a competitive industry.

Question to Ask #4: Leverage  of TerrAscend
The company maintains a conservative approach to leverage, with a growth in leverage of only 7.25% compared to the industry median of 11.24%. This lower leverage indicates a more stable financial structure, reducing the risk for investors. Despite the industry-wide increase in leverage, The company’s cautious strategy ensures it remains less exposed to financial volatility.

Question to Ask #5: Liquidity of TerrAscend
TerrAscend’s current ratio, although slightly below the industry benchmark, is set to improve with the refinancing of its $120M debt. The company is actively exploring refinancing options to secure a lower cost of capital. Upon successful refinancing, The company’s liquidity position will normalize, enhancing its financial stability.

Question to Ask #6: Cash Flow of TerrAscend
The company leads its peers in cash flow generation, with a levered free cash flow margin of 7.4%. This means that for every $100 of revenue, the company retains 7.4 cents for reinvestment or other purposes. Additionally, The company improved its cash flow by 19% over the last year, demonstrating strong operational cash generation capabilities. This solid cash flow provides the company with flexibility to invest in growth opportunities, reduce debt, or return value to shareholders.

Question to Ask #7: Valuation of TerrAscend
The company’s current stock price of $1.34 USD suggests significant upside potential. A blended valuation model indicates a fair value of $2.82 USD, with potential to reach $4.70 USD if favorable changes in 280E tax provisions are implemented. This suggests that the company is undervalued, offering an attractive entry point for investors looking to capitalize on the company’s growth prospects.

TerrAscend demonstrates solid revenue growth, gross margins, efficient SG&A management, conservative leverage, improving liquidity, strong cash flow, and attractive valuation make it an intriguing investment opportunity. As always, potential investors should conduct thorough due diligence and consider these key questions to make informed investment decisions. Want to be updated on Cannabis, AI, Small Cap, and Crypto? Subscribe to our Daily Baked in Newsletter!