Ranking and Understanding Valuation Metrics of US MSO Cannabis Companies – Market Cap / LTM Revenue
Today, we will discuss another key valuation metric: Market Cap / LTM (Last Twelve Months) Revenue. This metric allows investors to compare companies to their peers and decide on their relative value. As with other valuation metrics, investors use this to identify companies that appear undervalued or those with strong growth potential.
Some investors, known as value investors, look for companies that seem relatively cheaper compared to their peers, hoping to find better value. On the other hand, growth investors might prefer companies with higher valuations, betting that these companies will continue to outperform due to their perceived strength.
Either way, Market Cap / LTM Revenue can be a useful tool for ranking MSOs (Multi-State Operators) in the cannabis industry compared to their peers.
Market Cap / LTM Revenue Valuation Comparables Explained
Market Cap / LTM Revenue is a financial ratio that measures a company’s market capitalization relative to its revenue over the last twelve months. Market capitalization is calculated by multiplying the company’s current stock price by its total outstanding shares.
The Market Cap / LTM Revenue ratio is calculated by dividing the market capitalization by the company’s revenue for the past twelve months. This ratio helps investors understand how much they are paying for each dollar of revenue the company generates. A lower ratio might indicate that a company is undervalued, while a higher ratio might suggest overvaluation.
When comparing Market Cap / LTM 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.
Nuances to the Market Cap / LTM Revenue Multiple
While the Market Cap / LTM Revenue ratio is a valuable tool, there are nuances to consider:
- Growth Rates: Companies with higher revenue growth rates might have higher Market Cap / LTM Revenue ratios. This reflects investor expectations of future growth. Comparing growth rates alongside this ratio can provide a more complete picture.
- Profit Margins: Companies with higher profit margins might justify higher Market Cap / LTM Revenue ratios. A company generating more profit from its revenue is likely more efficient and valuable.
- Market Conditions: Broader market conditions and investor sentiment can also impact this ratio. Economic downturns or industry-specific challenges can cause fluctuations.
By keeping these nuances in mind, investors can use the Market Cap / LTM Revenue ratio more effectively, gaining deeper insights into the comparative valuation of MSO cannabis companies.
Market Cap / LTM Revenue vs. EV/Revenue: A Comparative Analysis
While both Market Cap / LTM Revenue and EV/Revenue are valuable metrics for evaluating companies, they have distinct differences that can influence investment decisions. Market Cap / LTM Revenue is simpler and focuses solely on market capitalization relative to revenue, providing a quick snapshot of how the market values a company’s revenue. However, it does not consider debt or cash, potentially overlooking important aspects of financial health. In contrast, EV/Revenue includes these factors, offering a more comprehensive view of a company’s total value and financial position. This makes EV/Revenue more accurate, particularly for companies with significant debt or cash, but also more complex and time-consuming to calculate. Investors should choose the metric that best suits their needs, using Market Cap / LTM Revenue for simplicity and quick assessments, and EV/Revenue for a fuller, more detailed valuation.
Ranking of MSOs by Their Market Cap / LTM 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 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
Market Cap / LTM Revenue can be a helpful valuation metric for determining whether a company is a good value compared to its peers. Typically, it is better to view multiple valuation metrics and blend them to find a valuation price for a company’s shares.
Check out our other blogs to help everyone prepare for earnings on topics like:
