You have likely heard me say that “+EBITDA is not a destination but a mile marker”. With the bulk of US MSO’s achieving +EBITDA I think it is time to add a new metric.
EBITDA is meant to evaluate operational prowess between peers by backing out from Net Income: • how they chose to fund their operations (debt versus equity which leads to interest expense) • how much automation versus direct labour and thus depreciation is incurred on automation investment, and • to neutralize tax regimes between peers… which we do not have because all these entities are in the US with listings in Canada.
Interest and Taxes are a cash expense. Taxes at times might be deferred but they are an obligation. And Lenders and the Tax man likes to be paid, on time. I had written an article on “Earnings Before Interest, Depreciation and Amortization and OPEX Burn/Generation” discussing the purpose of EBITDA if you would like to go down that rabbit hole, again.
Given that the 280e tax is a real cash burden, and it removes cash from operations which may require companies that exhibit a strong Adj EBITDA, I think investors should be aware of the implications of both taxes and the interest burden companies accrue during operating quarters.
I do caveat that taxes can swing if companies take actions that reverse taxes accrued. Acreage below is a good example below.
Net Operating Profit PLUS Non-Cash Expenses LESS Interest LESS Taxes: $’s
Think of this as quick and dirty Opex Burn/Generation calculation.
I have taken … • Regularized Net Operating Profit (“regularized” for non-recurring Expenses which I move to Other Expenses), • I add back non-cash expenses that occur in Operating Expenses and Cost of Goods Sold: depreciation and amortization and share based compensation • I then subtract both interest and taxes
Another way of putting this is… Adj EBITDA less Interest and Taxes.
What still impacts Net Income but not the above are all the non-recurring expenses and fair value fluctuations that might impact the balance sheet but not the operations of the company. These are usually domiciled in Other Income/Expenses below Net Operating Income.
The metric is not perfect as taxes can swing on impairments to goodwill and intangibles, as Acreage did in the above 3 quarters ago with a $188 million impairment on operations in Q1F2020. TerrAscend shows a like “burp” in the most recent Q, as they had a net tax credit for September 30, 2020 Q. I am not sure if that is tied to the substantial increase in Fair Value of Warrant and Derivative Liability. TER Taxes last Q were a credit of $1.8 million versus debits of $10 million and $8 million the preceding two quarters.
Note: Curaleaf should have a bounce upward next reported Q as they have their acquisition for the entire Q and transaction costs should drop off.
As I start to incorporate this new metric into Quarter in Pictures or Rundowns a quarterly explanation will be included.
Net Operating Profit PLUS Non-Cash Expenses LESS Interest LESS Taxes: % of Sales
This is what the above looks like as a % of sales.
As ALWAYS…. What goes into the calculation is as important as the trend it evidences.
More narrative will be provided as we record quarterly results, and we will incorporate this metric in the MSO Snapshot.
The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in any of the above listed companies (but does have a tangential interest in Liberty Health Sciences whom AYR has announced a merger) and will not start one in the next five days.
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