Sure, profit and loss matter, but it's one particular line item in a marijuana company's balance sheet that can make the difference between a hopeful investment and a hopeless waste of money.
In this video segment from Motley Fool Live, Healthcare and Cannabis Bureau Chief Corinne Cardina Jurney and longtime Motley Fool contributor Eric Volkman identify one all-important financial metric current and potential marijuana investors should keep a sharp eye on.
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Corinne Cardina: What would you say are some strategies on cannabis investing that folks might consider these days, given the pandemic, given how American pot stocks have really been outpacing Canadian stocks, what would you say to investors?
Eric Volkman: Well, I think the main thing, you have to remember that this is, again, a struggling industry. It's still very new. There's a lot of challenges to it. There are legal challenges, there are supply challenges, there are tax challenges, all kinds of things. It's very difficult to succeed. That's why most marijuana companies, no matter how sharp and smart their management might be, and there are a lot of smart people in this business; no matter how good it might be, they're still struggling.
They're still making losses on a regular basis to the point where nobody is surprised anymore. We've had a couple of the companies reporting lately. You know what? Honestly, I can't think of any that booked a profit.
But considering that, I think one good strategy I think investors should look at is how much cash, first of all, a company has.
That should be a consideration for any company, but it's particularly important in pot because they're constantly working at a loss in various aspects of their business oftentimes, like they're losing on supply, they're losing on retail, they're losing on whatever. If you look at something like Canopy Growth, they've stumbled as much as anybody. They have a lot of money behind them, so they are in a position where they can ride out this period to a point where maybe as per certain presidential candidates, maybe marijuana gets decriminalized/legalized, things get better for them, certain aspects of their business become less of a struggle.
Because a lot of pot companies, the smaller ones are on the bubble, they really don't have the cash to really float by to any meaningful extent. That's why you see I lost count months ago of how many companies are trying to raise funds either through instruments like convertible bonds or floating yet another issue of stock and diluting their shareholders yet again.
I would keep a sharp eye on that cash figure, how much a company has, how much it's burning through. Certain things are unavoidable. You launch a product line, you have to stand behind it, you have to put the money, and you have to bite the bullet until people start buying it. What you don't want to see with pot companies is a really chunky cash burn that doesn't seem to be resulting in any meaningful improvement in the business or any significant lifting of brand recognition.
Some companies like for example Cresco Labs (CRLBF -4.76%), they're spending a lot, but you see a dramatic and very noticeable increase in footprint like there are actually more dispensaries operated by the company and they're becoming a presence. Like if you want to buy pot in Chicago, there's a whole bunch of Cresco Labs dispensaries that you can buy it from. They're doing something with their money -- whether that's going to shake out in a meaningful profitability at any point in human history is a whole other story, but they're being active with their money.
Cash is king always. I would say it's definitely king in the marijuana industry, especially given that it's typically loss-making.
Cardina: Yeah, cash is also king during the pandemic when every dollar really counts these days.
