Preparing for Cannabis Earnings Season: Understanding EBITDA Margin
EBITDA margins have been improving as a whole for Cannabis MSOs over the last year; this has lowered the risk of cannabis company’s operations compared to the previous year. The EBITDA margin is an important financial metric that shows a company’s earnings before interest, taxes, depreciation, and amortization as a percentage of its total revenue. By excluding non-operational expenses, it provides a clear view of a company’s operational profitability. This can be thought of as the amount left over after paying your Cost of Goods Sold (used to calculate Gross Profit Margin) and Sales, General, and Administrative expenses, which we have written about in a previous blog post. Remember, though, this does not include any costs to run the business, from financing debt, investing in CAPEX, and many other structural expenses. It also does not include depreciation; depreciation is a non-cash expense, but it is also true that factories and machinery lose some of their value each year. Regardless, this margin is a good way to see how companies compare after paying their operating expenses.
Why is EBITDA Margin Important?
- Operational Efficiency: It highlights the profitability of a company’s core operations without the influence of capital structure, tax rates, and non-cash accounting items.
- Comparability: It allows for more straightforward comparisons between companies in the same industry by focusing on operational performance.
- Profitability: A higher EBITDA margin indicates a more profitable and efficiently managed company.
- Cash Flow Indicator: It provides an insight into the company’s ability to generate cash from operations, which is crucial for meeting obligations and funding growth.
Analyzing EBITDA Profit Margins in the Cannabis Industry
When analyzing EBITDA margins, consider the following trends:
- Year-over-Year Comparison: Compare the current EBITDA margin to the same period in previous years. An increasing trend indicates improving operational profitability.
- Sequential Changes: Examine the margin relative to the previous quarter. Significant changes can indicate shifts in operational efficiency, cost control measures, or revenue changes. Be aware that seasonality can disrupt a trend, and hence year-over-year comparisons are superior.
- Industry Benchmarks: Compare the company’s EBITDA margin to industry averages to understand its operational efficiency relative to peers.
- Management Commentary: Pay attention to explanations for margin changes. Management insights can provide context for strategic decisions impacting operational profitability.
Trends in the US MSO Cannabis Market
The US Multi-State Operator (MSO) cannabis market has shown positive trends in EBITDA margins over the last year. Here are some observations:
- Average Margin: The average EBITDA margin for US MSOs was 10.7%, with a median of 13.9% over the last twelve months.
- Improvement: Compared to the previous 12-month period, where the average was 9.1%, and the median was 9.8%, there is a clear improvement, indicating better operational efficiency and profitability.
- Industry Ranking: The table below ranks the top-performing MSOs by EBITDA margin. A higher margin reflects better operational profitability.
Looking Forward to Q2 2024 Earnings
As we approach the earnings season in August, comparing the upcoming Q2 2024 EBITDA margins with Q2 2023 is important. Companies aim to improve their margins by at least 1-2% annually, signaling better operational management and profitability. We will update our readers on each company’s progress as they release their earnings reports.
Like preparing for earning season? Read our other blogs, including on how to understand and rank Cannabis MSO in the following categories:
