Green Thumb Stock: Undisputed Cash Flow Champion In Cannabis (OTCMKTS:GTBIF)

Introduction

The past year has brought much sturm und drang in cannabis. There has been plenty of turmoil, certainly enough to keep investor attention and make them ask “what’s going on?”

The answer is we are in the throes of a bear market in all high-growth emerging industries, following a major bull market. Cannabis is down 12 out of the last 13 months. The decline has more to do with sentiment towards all emerging growth rather than industry-specific factors. While other emerging growth started down later, it has now caught up (or down), but that’s little consolation.

Although we know that markets go up and down, what’s an investor to do at this moment in time? We can start by stepping back from daily stock prices and looking at how our companies are actually performing. In this article we take a magnifying glass to financial statements and compare companies on some important basic measures, with emphasis on the most important: cash flow.

The importance of cash flow

Cash flow is the essence of a business. Without positive cash flow — more money coming in than going out — a business doesn’t survive. Without it, there are no profits. Doesn’t matter how much revenue growth there is, if you can’t get positive cash flow you won’t make it. Very simply, cash flow is one of the best measures of a company’s financial and operational health.

It’s true that new, emerging growth companies may go years without positive cash flow. A lot of money can go out for capital expenditures, establishing new operations, and so on. In cannabis, for example, when establishing a new cultivation operation, money goes out as the company must acquire land, build a facility, grow, and process before you get a penny coming in. Not to mention the burdensome and expensive regulations that are always present. The lack of positive cash flow at this stage is not necessarily a problem.

However, part of the reason that emerging growth is in trouble right now is that many companies have relied on debt or equity to fund operations as they get established, and new money is quickly drying up. Investors are nervous that companies like Carvana (CVNA) or Snowflake (SNOW) don’t have the cash flow to stand on their own. There’s a technical term for this: it called running out of money. This concern has spilled over into cannabis, although as the data here will show there is a great deal of variation between companies.

It’s important to see where cannabis companies stand with regard to cash flow for three reasons. First, as stated above, it is the lifeblood of any company. Second, positive cash flow demonstrates that management recognizes its importance. Third, positive cash flow shows that management has the ability to create it. This is by no means an easy feat; if it was, no one would ever go out of business. Spoiler alert: Among sizable companies, Green Thumb Industries Inc. (OTCQX:GTBIF) is the undisputed king when it comes to cash flow.

Three kinds of cash flow

There are three kinds of cash flow (as defined by Investopedia):

1. Investing cash flow – The amount of money generated or spent on investing activities such as purchase or sale of property, plant and equipment, or purchase or sale of securities as investments.

2. Financing cash flow – Money used to fund a company, such as issued debt, equity, or dividends.

3. Operating cash flow – Money involved directly with the production and sale of goods from ordinary operations. In other words, money coming in through sales minus operating expenses.

This article focuses on operating cash flow, which is the one that most closely reflects the health of a company’s ongoing operations. It’s also preferred here over another common metric, free cash flow, which is cash flow minus capital expenditures. Including the unusually high capital expenditures of cannabis companies at present would obscure the underlying operating performance.

Operating cash flow

The table below shows the operating cash flow at the heart of our thesis. This is a more useful measure than net income for showing the health of a company because income includes many non-cash lines, like depreciation, goodwill, stock-based compensation and inventory changes, that may have a minimal effect on operations.

Amazon (AMZN) is perhaps the best (albeit most extreme) illustration of this concept. Amazon had negative net income for many years but succeeded through brilliant cash flow management. In the table, although Green Thumb appears in second place behind Verano, they should be considered number one. Verano’s cash flow is inflated because they have elected to defer some income taxes. Verano views this as a low interest loan from the government. For 2021, this amounted to $108 million, which for comparison purposes must be subtracted from cash flow. With the subtraction, Verano still performed substantially better than all the competition except Green Thumb. In fact, two of the other companies with positive cash flow in 2021, Trulieve and Cresco, would have been negative if their smaller deferred taxes were considered. GreenThumb is current on taxes.

Other important metrics

Although not directly germane to this article’s thesis, it’s useful to see where Green Thumb and other companies stand on other significant measures. The tables below show data from the last three years for eight established companies. All numbers are in millions of USD and come from Seeking Alpha. If there’s a weakness in the data, it’s that three years is not enough to affirm trends with a high degree of confidence. But the industry is so new that three years is all we have when comparing across companies.

Revenue

First, we see that there are five companies in the top tier in terms of revenue. Green Thumb is third, was second, and will be fourth after the Cresco/Columbia Care merger.

Revenue	2019	2020	2021
CURLF	221	626	1209
TCNNF	253	521	938
GTBIF	216	557	894
CRLBF	124	463	805
VRNOF	66	228	738
AYRWF	75	155	358
AAWH	12	144	332
TRSSF	64	148	210

Net Income

The next table shows net income. Green Thumb is number one, and only three of the eight had positive net income in the last two years.

Net Income	2019	2020	2021
CURLF	-57	-109	-116
TCNNF	53	63	18
GTBIF	-59	19	80
CRLBF	-65	-93	-297
VRNOF	-18	39	-15
AYRWF	-164	-25	-17
AAWH	-33	-24	-123
TRSSF	-161	-139	3

Interest on long term debt

Debt is on the mind of many cannabis investors because some companies have been using it as a major source of expansion capital. The gross amount is less important than the ability to service it and eventually pay it off or refinance. Interest reduces cash flow and net income and can be a burden if too high. The next table shows the amount of interest paid on long term debt.

LT DEBT INT	2019	2020	2021
CURLF	22	67	88
TCNNF	10	25	44
GTBIF	14	19	22
CRLBF	19	33	55
VRNOF	1	10	24
AYRWF	3	6	30
AAWH (est.)	6	13	25
TRSSF	0	8	26

Stock-based compensation

The last table presents data on stock-based compensation. While SBC doesn’t affect total cash flow, it’s on the mind of emerging growth investors because of its excessive use in certain industries. The numbers show that cannabis uses it in varying degrees. The significance of SBC is hotly debated (see this recent article by Deep Value Ideas), so I leave it to each reader to draw any conclusions.

SBC	2019	2020	2021
CURLF	17	31	46
TCNNF	0	3	9
GTBIF	18	19	20
CRLBF	15	19	28
VRNOF	0	0	1
AYRWF	29	31	27
AAWH	0	1	23
TRSSF	8	10	15

Summary and recommendations

Okay, so now you know I am a numbers geek. It bears saying, though, that no group of financial figures can predict the future success of a company. Numbers are evidence about how well a company is doing at one point in time. They also provide useful information about how a company is doing compared to others in its industry, and are thus a tool to evaluate management.

Numbers on a financial statement have different degrees of importance at different times. For cannabis, operating cash flow is currently one of the most important. Concomitant with rapid expansion, capital investment, and fast growing revenue comes the uncertainty about whether those numbers will lead to profit. Operating cash flow is the basic indicator that a company is able to bring in more cash than it expends, and a precursor to net income. On this critically important measure, Green Thumb is far above most major cannabis companies. It is also at the top in net income, where other majors like Curaleaf and Cresco are deeply in the red. Looking back over three years of data, Green Thumb is on a positive trend on these important measures, suggesting that it’s outperformance will continue.

Poor stock performance, terrible sentiment, and the inherent risk in emerging growth have pushed all of cannabis way down, but underneath the stock prices all cannabis companies are not the same. The data presented here reveals Green Thumb is one of the superior operators and has been for some time. It’s well recognized that in a bull market stocks go up well beyond their fundamentals, and in a bear market they go down to a similar extreme. Now is the time to invest in superior companies like Green Thumb, where proven ability will shine brightly when the market inevitably turns around.