How Efficient are the MSOs at Generating Cash?

Considering the lack of capital available in the cannabis industry, I wanted to know how efficient (or inefficient) the “Big 6” MSOs are at managing their working capital. One way to evaluate the quality working capital management is by analyzing the the Cash Conversion Cycle (CCC).

In plain English, the CCC measures 1) how quick the business can take cash, 2) make something of value, 3) sell it for a profit, and 4) convert it back to cash. Elaborated below, this is calculated as: CCC = DIO + DSO – DPO.

Days Inventory Outstanding (DIO) is the number of days it takes a company to convert its inventory into sales. For my analysis, I added biological assets to inventory.

DIO = Average Inventory / (Sales / 365)

Days Sales Outstanding (DSO) is the number of days it takes a company to collect its receivables. Since the cannabis industry is currently a “cash” business, the number of days it takes to receive cash from customers is relatively low.

DSO = (Average Accounts Receivable / Sales) * 365

Days Payable Outstanding (DPO) is the number of days it takes a company takes to pay back its payables. Since I included biological assets in the inventory for DIO, the cost of goods sold is after all fair value adjustments.

DPO = (Average Accounts Payable / Cost of Goods Sold) * 365

For the MSOs, I annualized the most recently quarterly results, given the growth over the past year. At first glance, I am impressed that GTII’s CCC is is 21.6 days, compared to TRUL’s at 178.4 days. As the industry matures, I expect these figures to level out, but wanted to highlight my thoughts as something to keep in mind going forward.