Rule of 40 and Cannabis Growers: The Last 12 Months’ High Flyers

The TDR Three Takeaways:

  1. The Rule of 40 is a key performance metric for cannabis growers, indicating their success in balancing growth and profitability.
  2. It serves as a benchmark for the financial health of cannabis companies, highlighting those that achieve sustainable growth.
  3. Analyzing cannabis growers using the Rule of 40 over the past year reveals industry leaders and trends in growth and profitability.

Each quarter, we are going to track the Rule of 40 for the Cannabis Growers based on their last 12-month performance. The Rule of 40, a metric highly valued by venture capitalists and growth equity investors, is particularly pertinent to cannabis manufacturers, similar to its relevance in the technology sector. Both industries focus intensely on developing products, growing brands, and rapidly increasing revenue. In the competitive landscapes they operate in, balancing growth with profitability is critical. This rule, therefore, offers a valuable lens through which to assess these companies’ performances. In the following analysis, I will highlight which cannabis manufacturers have successfully met the Rule of 40 criterion in the last 12 months, demonstrating their ability to effectively balance growth and profitability.

Applying the Rule of 40, which sums levered free cash flow margin and revenue growth, provides an insightful snapshot of a company’s financial health. For instance, when assessing Apple’s performance over the last twelve months, its levered free cash flow margin stands at 26.0%. However, when this figure is combined with its revenue growth of -2.8%, the total reaches only 23.2%. This calculation indicates that, despite Apple’s strong cash flow, its growth rate during this period did not meet the 40% benchmark set by the rule, underscoring the challenge even established companies face in maintaining a balance between profitability and rapid growth.

Cannabis manufacturers, in particular, find this metric well-suited to their operational context. They are in a phase of intense growth, focusing on product development, market expansion, and brand establishment – similar to early-stage tech companies. However, like all businesses, they must also pay close attention to profitability to ensure sustainable growth. The Rule of 40 helps in identifying those cannabis companies that have not only expanded rapidly but have done so while maintaining or improving their profitability margins.

The relevance of the Rule of 40 to cannabis manufacturers lies in its ability to distill complex financial narratives into a single, comprehensible figure. It serves as a barometer for the financial health of these companies, encapsulating the dual objectives of growth and profitability that are so crucial in their fast-evolving industry. As such, highlighting cannabis manufacturers that have achieved this benchmark in the last 12 months not only recognizes their success but also provides a model for other companies in the industry striving for balanced and sustainable growth.

Drumroll, please: The winners for the quarterly period ending Q3 2023, ranked from highest to lowest among those that qualified for the Rule of 40, are as follows:

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