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Understanding and Ranking Valuation Metrics of US MSO Cannabis Companies: LTM EBIT Yield

Today, we will discuss another key valuation metric: LTM (Last Twelve Months) EBIT Yield. This metric helps investors compare companies to their peers and assess their relative value. Investors use this to find companies that seem undervalued. This metric is rare but is suited to Cannabis MSOs. Considering companies before 280E taxes is important, but also takes out fewer components like EBITDA, which takes out depreciation and amortization. Think of this as EBITDA margin, but add back in depreciation. Sometimes, depreciation can be overstated to reduce taxes, but depreciation is real; items like machinery are less valuable in the future, and they have lifespans that are limited. 

What is LTM EBIT Yield?

LTM EBIT Yield is a financial ratio that measures a company’s EBIT (Earnings Before Interest and Taxes) over the last twelve months relative to its market capitalization. 

This ratio indicates how much EBIT a company generates for each dollar of its market capitalization. A higher yield suggests that the company generates more earnings than its market value, which might indicate an undervalued stock. Conversely, a lower yield could suggest overvaluation.

Importance of LTM EBIT Yield for MSOs

For Multi-State Operators (MSOs) in the cannabis industry, LTM EBIT Yield is particularly useful. It allows investors to:

  1. Compare Profitability: Determine which companies are more profitable relative to their market value.
  2. Assess Operational Efficiency: Identify which companies manage their operations efficiently, generating higher earnings from their revenue.
  3. Evaluate Investment Value: Find potentially undervalued stocks that generate strong earnings relative to their market capitalization.

Nuances to Consider

While LTM EBIT Yield is a valuable tool, several nuances should be considered:

  1. Revenue Growth Rates: Companies with higher revenue growth might have lower EBIT yields. Investors are willing to pay a premium to fast growing companies which produces a lower EBIT yield.
  2. Profit Margins: Higher profit margins can justify lower EBIT yields. Companies with efficient operations generate more earnings from their revenue.
  3. Negative numbers: This is when a company has lost even before considering interest and tax.

LTM EBIT Yield vs. Other Metrics

LTM EBIT Yield is one of many valuation metrics. Here’s how it compares to others:

  1. Market Cap / LTM Revenue: This ratio focuses on market capitalization relative to revenue. It provides a quick snapshot of how the market values a company’s revenue but doesn’t consider earnings or profitability.
  2. EV/EBIT: Enterprise Value (EV) includes debt and cash, offering a more comprehensive view of a company’s financial health. EV/EBIT provides a fuller valuation compared to LTM EBIT Yield, which focuses solely on market capitalization and EBIT.

Ranking MSOs by Their LTM EBIT Yield

Investors can use it to rank MSOs, identifying which companies offer the best earnings relative to their market value. This ranking helps in making informed investment decisions, especially when compared to other metrics. For this variable, the higher the yield, the more compelling the current valuation.

Tracking LTM EBIT Yield During Earnings Season

To track LTM EBIT Yield during earnings season:

  1. Monitor Earnings Reports: Keep an eye on each MSO’s earnings report.
  2. Update Data: Use platforms like Capital IQ or Yahoo Finance to get updated earnings data.
  3. Calculate the Ratio: Divide the latest EBIT by the current market capitalization to get the updated yield.

Key Takeaway

LTM EBIT Yield is a useful metric for evaluating the relative value of MSO cannabis companies. It should be used alongside other valuation metrics to get a comprehensive view of a company’s financial health and investment potential.

Check out our other blogs to help you prepare for earnings on topics like:

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