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How US Cannabis MSOs Rank for Account Receivable Turnover

This week, we’re examining cash flow metrics. Yesterday we looked at Days Inventory Outstanding and looked at how this metric can predict future challenges companies could experience with inventories and liquidity. As the cannabis industry matures, additional financial metrics become essential. One such metric is Day Sales outstanding (DSO), which provides insight into how efficiently companies manage their account receivables. In this post, we’ll explore what DSO is, why it’s important, and how cannabis multi-state operators (MSOs) stack up against each other. Later this week, we will look at accounts payables.

What is Days Inventory Outstanding?

DSO measures the average number of days it takes a company to collect payment after a sale. It is calculated by dividing accounts receivable by the total credit sales and multiplying by the number of days in the period. A lower DSO indicates that a company collects payments quickly, improving its cash flow and liquidity. For example, if investors had monitored the DSO of struggling retail companies, they might have noticed rising DSO levels, signaling potential cash flow problems ahead.

Why is DIO Important?

Understanding DSO is essential for several reasons:

  1. Cash Flow Management: A lower DSO means quicker payment collections, which enhances cash flow and allows for timely reinvestment in the business or debt reduction.
  2. Financial Health: Efficient receivables management reflects positively on a company’s financial health, indicating effective credit policies and customer relationships.
  3. Liquidity: Companies with a low DSO have better liquidity, reducing the risk of cash shortages and ensuring smooth operational processes.
  4. Performance Benchmarking: DSO provides a metric to compare how well companies manage their receivables against industry peers, highlighting best practices and areas needing improvement.

Ranking of MSOs by DIO

Below is the number of days each company takes to sell its inventory over the last twelve months. A lower number is preferred, showing that the MSO uses its capital and inventory more efficiently. The next column shows how many days this metric has improved compared to the previous twelve-month period. A positive number in the second chart is an improvement, whereas a negative number is a step backward.

How to Track This Ratio During Upcoming Earnings Season

If you hope to review this after each MSO’s earnings report, you will likely be disappointed. You will have to wait for a few days until systems like Capital IQ, Yahoo Finance, etc., update their earnings data. You will then have to calculate this ratio yourself. However, we will be doing this for our readers in the future after earnings and will share how companies are improving or falling back with their inventories.

Big Takeaway

Do you remember last week we shared an article about the current ratio? We shared how inventories are part of the current ratio. We also warned that one can’t pay their bills with inventories, so be careful not to put too much faith in a high current ratio. This is especially true of a company with low inventory turnover; in this case, the MSO likely has an overstated current ratio. For example, Canadian companies/LPs would have overstated current ratios before they destroyed their high inventories. Investors would have been warned if they saw high and increasing DIO ratios.

Check out our other blogs to help everyone prepare for earnings on topics like:

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