Different Methods for Cannabis Investment Valuations
Assessing the value of any cannabis investment is necessary not for businesses, but also for investors. Valuation itself is a complex process, but it becomes even more complex with cannabis businesses. Shifts in regulations and market conditions add a potentially unpredictable layer to a business. However, there are methods investors can use to make the best financial decisions.
Commonly Used Methods for Cannabis Investment Valuations
There are several commonly used methods for cannabis valuation that can be utilized to take the analysis of a business a step further.
The most commonly used methods for valuation within the cannabis industry are:
Discounted Cash Flow Analysis (DCF)
This method measures the value of a company based on the value of all future projected cash flows. Because of this, DCF is dependent on multi-year projections. If projections hold true, DCF is an accurate and beneficial way of valuing a company. It’s important to keep in mind, however, that projections can be overly optimistic.
Precedent Transactions Analysis
Precedent transactions analysis examines the metrics of similar businesses or assets that have been sold or raised as capital. This includes enterprise value, revenue value, and EBITDA. In examining similar transactions, investors can determine an approximate value that is adjusted for the size and growth of a company. This method does not account for the intangible qualities of a business, like leadership.
Public Comparable Company Analysis
With this method, a company is valued by analyzing its metrics against a comparable, publicly traded company. Much like precedent transactions analysis, adjustments will have to be made to account for some differences between them, such as size and growth.
Public comparable company analysis can be a helpful method of valuation, but it is often more useful in well-established industries with many companies for comparison.
Adjusted Net Asset Approach
This last method values a company based on the fair market value of its assets. This includes tangible assets like equipment, licenses, and staff. However, it can also include intangible assets, like a brand name or customer base.
An adjusted net asset approach is beneficial because it values the tangible parts of a company that can help investors to recoup a part of their investment should something go wrong. It does not, however, consider income-generating potential.
Each of these methods has its strengths and weaknesses, but each one can serve investors in valuing cannabis companies.
Due Diligence is Everything
Investors in cannabis stocks must do their due diligence. Valuation is key for making smart investments and knowing what you are getting into. With these methods, investors can make more informed financial decisions.
For more on cannabis stocks and the cannabis industry as a whole, check back in with us at the Dales Report!