EXCLUSIVE: The Metrics That Matter — Or How To Understand The Value Of Cannabis Companies

Cannabis companies led by teams who understand the importance of cash flow and how to work a balance sheet while keeping things "lean and mean" are "going to be the winners."

That's according to Jessica Straw, EIR director at Progress Partners, who joined the Benzinga Cannabis Capital Conference Wednesday in Chicago, Illinois, to talk about how to assess the value of a cannabis business.

She was among the experts in a panel discussion moderated by Tim Seymour, founder and chief investment officer of Seymour Asset Management, portfolio manager of the Amplify Seymour Cannabis ETF CNBS and regular contributor to CNBC.

The panelists and Seymour agreed this integration is a complex task, as the industry is still relatively new and operates in a rapidly evolving legal and regulatory landscape.

But there are several key factors that can help better understand these companies' value and potential.

See Also: What Are Cannabis Investors Waiting For To Deploy Capital? It's All About This One 'Signal'

Financial Metrics & Valuation Methods

Straw, who has vast experience working within the non-plant touching cannabis market, said she focuses on metrics such as revenue, profitability, team, tech and growth while assessing cannabis ancillary companies.

"We focus on five key pillars and the theme running through those five key pillars is the strategic importance," she said.

Straw also commented on the resilience she observed in the public cannabis markets over the past 18 months. There was "almost a survival mechanism kicking in because there has been a lot of disruption on the growth and client sides."

Rob Sechrist, president of Pelorus Equity Group, a cannabis-focused provider of real estate debt financing solutions, said the company assesses each state as an individual market.

Why? Each state is "going through what we would call a maturation to a fully stabilized market," he explained.

Observing sequences that each new cannabis market goes through as it rolls out is important in assessing which companies to lend money to, said Sechrist, who also co-manages the Pelorus Fund, a private mortgage real estate investment trust.

"We're looking at it, how things are going to land in that state at the end of the day," he added.

Aaron Grey, CFA, CPA, a managing director and head of consumer research at A.G.P./Alliance Global Partners, said over the past 12 to 18 months the approach to assessing companies' values has shifted from "where are we going" to "where we are today."

"Using those 'where we are going' financial metrics kind of got us ahead of ourselves," he said.

The focus shifted to metrics such as the ratio of EV/EBITDA, cash flow, balance sheet and "asking who can survive in the markets that we are today," Grey continued, adding that a shift back to "where are we going" approach will eventually happen.

Cannabis & CPG

Cannabis analyst Matt Bottomley, who serves as managing director of equity research at Canaccord Genuity, said that despite an upswing in cannabis stock prices over the past few weeks due to the federal catalyst, the market is still undervalued. Cannabis companies still have a long way to go before being able to act like CPG companies.

The main obstacle to cannabis being traded in a CPG Multiple math is the federal status of cannabis, as it strips marijuana brands of a possibility to be built and known nationally, he said.

Regarding brand building, Progress Partners' Straw noted it's essential to find a way to differentiate and stand out among other entrepreneurs in the space.

Looking through the prism of equity investors, knowing what "the end game is" from an M&A perspective is important. "The leverage is always in the hands of the company that will be bought," Straw said.

Read Next: EXCLUSIVE: What It Takes To Build A Successful Cannabis Edibles Brand, A Discussion With Industry Leaders

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Photo: Carlos Alvarez/Benzinga