Aurora Cannabis (ACB -2.96%) hit a long-awaited milestone in its most recent earnings results: adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability. It's not a true accounting profit, but it is what many cannabis companies aim for.
But what does that really mean for investors, and is it a big deal? Here's a closer look at how Aurora achieved an adjusted EBITDA profit, and whether that should impact your decision to buy the stock or not.
What adjusted EBITDA is and isn't
Having an adjusted EBITDA profit isn't the same as reporting a positive net income number. There is no reporting standard for adjusted EBITDA per generally accepted accounting principles (GAAP).
For investors, this means that the company has significant leeway into what goes into the calculation. Since it's a non-GAAP (adjusted) number, a company can make adjustments to that number that it otherwise wouldn't be able to make to net income.
And so while it is an adjusted earnings calculation, it isn't a metric that may be all that comparable from one company to the next.
These are all the adjustments to earnings that Aurora made to arrive at adjusted EBITDA
Aurora reported its second-quarter results in February and for the period ending Dec. 31, 2022, its adjusted EBITDA profit totaled 1.4 million Canadian dollars, compared to a loss of CA$7.1 million in the prior-year period. However, the company's actual reported net loss for the period was CA$67.2 million. Here's a look at how that morphed into an adjusted EBITDA profit:
Image source: Company filings. Chart by author.
The one thing that stands out to me is the broad range of adjustments here. There are so many potential categories where Aurora can make an adjustment and back out costs. It becomes difficult to know how the company performed given all of these adjustments. And unfortunately, this is the norm in the cannabis industry and that means evaluating companies based on adjusted EBITDA can be incredibly challenging.
Investors are better off following cash flow
Cannabis companies can have volatile earnings due to changes in fair value, which can heavily impact the bottom line; in the chart above, fair value and impairment was the largest category and had the biggest impact on adjusted EBITDA. As a result, a case can be made that adjusted earnings are important. But given the number of adjustments Aurora has made to adjusted EBITDA, I'd also argue the metric still isn't useful, given how much noise there is in that final number.
To get a better idea of how a company is doing, investors may be better off looking at cash flow. This gives you insight into how much money is flowing into and out of the business. And cash is an important consideration, especially for marijuana companies, because being low on cash may mean that a business needs to raise money via debt or issuing shares (and that results in dilution for shareholders).
During its most recent quarter, Aurora used up CA$60.6 million from its day-to-day operating activities, which is far worse than the CA$21.6 million it used up in the same period last year. When put within that context, the adjusted EBITDA profit doesn't look as impressive anymore.
Aurora isn't a buy based on its recent results
Achieving adjusted EBITDA may be important for the company to hit that milestone and to show that it came through on its promise. But I would be more concerned about the company's worsening cash burn, or that its net revenue of CA$61.7 million rose just 2% year over year.
It's hard to make a case for buying shares of Aurora as this has been a disastrous pot stock to own; in five years, it has fallen an incredible 99% in value. Adjusted profitability or not, there's little doubt in my mind this stock is heading for another reverse stock split as its share price isn't likely to rebound anytime soon.
