Preparing for Cannabis Profit Season: Understanding EBITDA Margins

EBITDA margins have been improving as a whole for Cannabis MSOs over the past year; this has reduced the risk of the cannabis company’s business compared to the previous year. EBITDA margin is an important financial metric that shows a company’s earnings before interest, taxes, depreciation, and amortization as a percentage of its total revenue. Excluding non-operating expenses, it provides a clear picture of a company’s operating profitability. It can be thought of as the amount left after paying Cost of Goods Sold (used to calculate gross profit margin) and Selling, General, and Administrative expenses, which we discussed in a previous blog post. Keep in mind, however, that this does not include any of the costs of doing business, from financing debt, investing in CAPEX, and a variety of other structural expenses. It also does not include depreciation; depreciation is a non-cash expense, but it is also true that plants and machinery lose some of their value each year. Regardless, this margin is a good way to compare how companies are doing after paying operating expenses.

Why is EBITDA margin important?

1. Operational efficiency:Emphasizes the profitability of a company’s core operations without the influence of capital structure, tax rates, and non-cash accounting items.
2. Comparability:Allows simpler comparisons of companies within the same industry, focusing on operational efficiency.
3. Profitability:A higher EBITDA margin indicates a more profitable and efficiently run company.
4. Cash flow indicator:Provides insight into a company’s ability to generate cash from operating activities, which is key to meeting obligations and financing growth.

Cannabis Industry EBITDA Profit Margin Analysis

When analyzing EBITDA margins, the following trends should be considered:

1. Year-on-year comparison: Compare the current EBITDA margin with the same period in previous years. growing trend indicates improvement in operating profitability.
2. Sequential changes: Check the margin from the previous quarter. Significant changes can indicate changes in operating efficiency, cost control measures or changes in revenue. Keep in mind that seasonality can disrupt the trend, so year-over-year comparisons are better.
3. Industry benchmarks:Compare a company’s EBITDA margin to industry averages to understand its operating efficiency relative to its competitors.
4. Management Commentary: Pay attention to explanations for margin changes. Management insights can provide context for strategic decisions that impact operating profitability.

Trends in the US MSO Cannabis Market

The US Multi-State Operator (MSO) cannabis market has shown positive trends in EBITDA margins over the past year. Here are some observations:

• Average marginThe average EBITDA margin of US MSOs was 10.7%, with a median of 13.9% over the last twelve months.
• Improvement:Compared to the previous 12-month period, where the average was 9.1% and the median was 9.8%, there is a clear improvement, indicating greater operational efficiency and profitability.
• Industry ranking:The table below ranks the best performing MSOs by EBITDA margin. Higher margins reflect better operating profitability.

We look forward to the results for Q2 2024.

As we approach earnings season in August, comparing upcoming Q2 2024 EBITDA margins to Q2 2023 is important. Companies are targeting at least 1-2% improvement in their margins annually, signaling improved operational management and profitability. We will update our readers on each company’s progress as they release their earnings reports.

Do you enjoy getting ready for the earnings season? Read our other blogs, including how to understand and classify Cannabis MSO into the following categories:

1. Gross Profit Margin and Cost of Goods Sold
2. Sales, General and Administrative Margin

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