How US Cannabis MSOs Rank for Days Payable Outstanding

This week, we’re examining cash flow metrics. Yesterday, we looked at Days Receivables Outstanding and explored how this metric can predict future challenges companies could experience regarding liquidity. As the cannabis industry matures, additional financial metrics become essential. One such metric is Days Payable Outstanding (DPO), which provides insight into how efficiently companies manage their accounts payable. This post will explore what DPO is, why it’s essential, and how cannabis multi-state operators (MSOs) stack up against each other.  This metric is tricky; it can be both good and bad, and it requires a deeper look to decide what the ratio tells an investor. 

What is Days Payable Outstanding?

DPO measures the average days a company takes to pay its suppliers after a purchase. It is calculated by dividing accounts payable by the cost of goods sold (COGS) and multiplying by the number of days in the period. A higher DPO indicates that a company is taking longer to pay its suppliers, which can signify good cash flow management if done strategically. But, here is the nuance: if a company pays its suppliers late due to a credit crunch, that is a warning sign. This analysis takes some discretion as an analyst. For example, if you are looking at Walmart and you see they have increased their days of account payables, you are happy as a shareholder as they are forcing suppliers to carry them and better terms. If you are looking at a small company, this could be a sign they have a cash crunch. Typically, I prefer that, over time, companies improve their days payable and make them shorter. 

Why is Days Payable Outstanding Important?

Understanding DPO is essential for several reasons:

• Cash Flow Management: A higher DPO allows a company to hold onto its cash longer, improving its liquidity and enabling better cash flow management. But, it also could be a sign of having trouble paying its bills.
• Supplier Relationships: Efficient payables management positively reflects a company’s financial health and ability to manage supplier relationships.
• Liquidity: Companies with a higher day payable outstanding have better liquidity, as they can use their cash for other immediate needs rather than quickly paying off suppliers. But, this could also be a sign of cash flow problems.
• Performance Benchmarking: DPO provides a metric to compare how well companies manage their payables against industry peers, highlighting best practices and improvement areas. It also can be a sign of challenge, so you have to use other ratios to decide on the company’s cash flow performance.

Ranking of MSOs by Days Payable Outstandig

Below is the number of days each company has taken to pay its suppliers over the last twelve months. A higher number is generally preferred for the company, but I have ranked them as lower being better, as it shows strength. Different analysts would debate this view, but I believe it is a strength for a company to pay bills quickly.

How to Track This Ratio During Upcoming Earnings Season

If you hope to review this after each MSO’s earnings report, you will likely need 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 do this for our readers in the future after earnings and share how companies are improving or falling back with their payables management.

Big Takeaway

I like companies that are improving how quickly they pay their suppliers. I prefer that they improve and pay quicker each year. Many analysts debate this and disagree with me; they feel stretching account payable terms is a sign of strength. This is good information, and the investors can interoperate how they wish. I believe that small cap cannabis companies are not Walmart, and investors should prefer quicker payment times of account payables. 

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

• Selling, General, and Administrative Margin
• Gross Profit Margin
• EBITDA Margin
• Total Liabilities to Total Assets Ratio
• Dilution
• Levered Free Cash Flow Margin
• Current Ratio
• Day Sales Outstanding
• Days Inventory Outstanding

Want to be updated on Cannabis, AI, Small Cap, and Crypto? Subscribe to our Daily Baked in Newsletter!