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Newly Cash Flow Positive US Cannabis MSOs Trade at Multi-Year Low Stock Prices

I am going to start this article with a very bold statement. If, as an analyst, I was allowed only one metric to track the financial progress of US Cannabis MSO (MSO), it would be Levered Free Cash Flow Margin (LFCFM). The unusual thing is that it is rarely used, even though it is extremely valuable.  I will formally share my thinking below, but to introduce it, it does not have to be overly complicated. If you’re running a family budget, small business, or multi-billion dollar MSO, one simple way to measure progress is how much cash you have left in the bank after the month (or quarter if you are a public company). Higher cash means progress; you are going backward if you have less cash. I love the simplicity of this ratio. 

What is Levered Free Cash Flow Margin and Why Does it Matter?

LFCFM measures the percentage of revenue remaining after a company has paid its operating expenses, interest on debt, and capital expenditures. Notice this includes even capital expenditures, which are future investments. It also measures the change in account receivables and payables. If you sell goods on credit, that shows as revenue but not levered free cash flow. LFCFM, by far, is the most punishing financial metric that an analyst can use, in my opinion.

The cash left over can be used to pay down debt, buy back shares, or even pay dividends in the future. But, the opposite is true; if you always have a negative balance, eventually, you need to take on debt or offer some shares.

LFCFM shows how much cash a company generates for every dollar of revenue after meeting its financial commitments. A higher LFCF Margin indicates a company is better at converting its revenue into cash that can be used to enhance shareholder value.

How to Calculate Levered Free Cash Flow Margin

To calculate the Levered Free Cash Flow Margin, you take the levered free cash flow and divide it by the total revenue. Then, you multiply the result by 100 to express it as a percentage. 

Positive LFCF Margin: A positive LFCF Margin indicates the company is generating enough cash to cover its financial obligations and still has cash left over. This is a good sign for investors as it suggests financial stability and potential for reinvestment or debt reduction.

Negative LFCF Margin: A negative LFCF Margin means the company is not generating enough cash to cover its financial obligations, which could signal financial distress or the need for additional financing.

Ranking US Cannabis MSOs by Levered Free Cash Flow Margin

The charts below show two separate data points. First, they rank companies by their LFCFM; higher is better. The second chart shows the improvement over the last year; the higher up the company, the more it improved its LFCFM compared to its peers. 

From the chart above, we can see interesting observations; here are my key takeaways:

  1. Despite historic lows, MSOs have made remarkable progress regarding cash flow in the last 12 months; most companies are positive or close to positive. 
  2. This was not the case in the previous 12-month period; almost all the companies had negative cash flows.
  3. Becoming positive with cash flow de-risks companies. The chances of insolvency, dilution, and rising debt levels are mostly eliminated. Companies can pay down debt, increase Capital Expenditures, buy back shares, and even pay dividends one day. 
  4. Based on the above, this is the year that these positive cash flow MSOs have shifted from growth companies to mature growth companies. 

Why are US MSOs down in price with all of this progress?

This is a million-dollar question, but I suspect most people or investors are unaware of the cash flow improvements. Yesterday, I was at an event with institutions and family offices, and no one I spoke with was aware of this.

I also don’t hear much commentary about metrics like LFCFM. I believe that if companies stopped focusing on things like “Adjusted EBITDA” and shared metrics regarding positive cash flow, it would help build investor confidence with new investors.

How Can Investors Track This Number During Earning Season?

Some companies share numbers about operating cash flows in their earnings press release, but it is very rare to see reports on LFCFM. Typically, it takes a day or two for systems like Capital IQ or Bloomberg to update their systems after an earnings release. After earnings season, I will track this data for investors who read our editorials on the TDR website. 

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