Ranking and Understanding Valuation Metrics of US MSO Cannabis Companies – EV/Revenue
Earlier this week, we looked at cash flow KPIs, including account receivables, payables, and inventory outstanding. We are not going to shift into discussing some valuation metrics. The valuation metrics will compare companies to their peers to allow investors to decide the comparative value of the companies compared to their peers. There are two schools of thought to these valuations. Some investors use these valuations to pick companies that appear relatively cheaper and have a better value than competitors. These types of investors would typically be described as value investors.
Other investors may prefer companies with higher valuations, as they may feel that stronger companies have higher valuations and will continue to outperform; this would be more of a growth investor philosophy. For example, JPM has a strong track record in dominance in the banking sector, and it has traded at a higher valuation for decades compared to its peers.
Either way, these relative valuations can be useful for viewing and ranking the MSOs compared to their peers. Today, we are going to look at EV/Revenue valuation comparables.
EV/Revenue Valuation Comparables Explained?
EV/Revenue, or Enterprise Value-to-Revenue, is a financial ratio that measures the value of a company relative to its revenue. Enterprise Value (EV) includes a company’s market capitalization, debt, and cash, providing a more comprehensive view of a company’s total value.
The EV/Revenue ratio is calculated by dividing the enterprise value by the company’s revenue. This ratio helps investors understand how much they are paying for each dollar of revenue the company generates. A lower EV/Revenue ratio may indicate that a company is undervalued, while a higher ratio might suggest overvaluation.
When comparing EV/Revenue ratios among MSOs, investors can identify which companies are trading at a discount or premium relative to their peers. This comparison provides insight into the market’s perception of each company’s growth potential and operational efficiency.
In the context of MSOs, this valuation metric is particularly useful given the diverse regulatory environments and market dynamics across different states. By examining EV/Revenue ratios, investors can make more informed decisions about which cannabis companies offer the best value for their investment goals, whether they lean towards value investing or growth investing.
What are the nuances to the EV/Revenue Multiple?
While the EV/Revenue ratio is a valuable tool, there are nuances to consider:
- Revenue Quality: Not all revenue is equal. High-quality revenue comes from consistent and repeatable sources, while low-quality revenue might be one-time or non-recurring. Investors should consider the sustainability and reliability of the revenue streams.
- Growth Rates: Companies with higher revenue growth rates might have higher EV/Revenue ratios. This reflects investor expectations of future growth. Comparing growth rates alongside EV/Revenue ratios can provide a more complete picture.
- Profit Margins: Companies with higher profit margins might justify higher EV/Revenue ratios. A company generating more profit from its revenue is likely more efficient and valuable.
- Debt Levels: High levels of debt can inflate EV, impacting the EV/Revenue ratio. Understanding a company’s debt situation is crucial for accurate valuation.
By keeping these nuances in mind, investors can use the EV/Revenue ratio more effectively, gaining deeper insights into the comparative valuation of MSO cannabis companies.
Ranking of MSOs by Thier EV/Revenue
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 ranking compared to their peers.
Big Takeaway
EV/Revenue can be one helpful valuation metric to tell if a company is a good value compared to its peers. Typically, it is better to view multiple valuation metrics and blend them together to find a valuation price on a company’s shares.
Check out our other blogs to help everyone prepare for earnings on topics like:
