For too long, cannabis companies have been aggressively expanding without much regard for costs. Now, however, with the industry's growth stalled and share prices nose-diving, companies are paying more attention to costs and are focusing on reducing expenses and conserving cash. Does this make them better and safer buys right now?

Can cannabis companies finally turn a profit?

If you've followed the earnings report for cannabis companies, then you've likely seen plenty of references to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). These are adjusted numbers and are not true accounting profits.

Trulieve Cannabis (TCNNF -1.19%), for example, consistently posts an adjusted EBITDA profit and even references an adjusted EBITDA margin that's normally around 30%. If those were the company's real profit margins, they would be impressive. But for the first three months of 2023, Trulieve incurred a net loss of $64.1 million, and it was only after making numerous adjustments, including adjusting out legislative campaign contributions totaling $10.5 million, that it was able to get to an adjusted EBITDA profit of $78.2 million.

Yet, despite these adjusted earnings profits, the company announced on June 1 that it would be closing down some retail outlets in California and that it would also wind down its Massachusetts operations in an effort to "preserve cash and improve financial performance."

Rival Curaleaf Holdings (CURLF -1.35%) announced even more drastic measures in January, stating that it would exit three top cannabis markets -- California, Colorado, and Oregon. Curaleaf also reported an adjusted EBITDA profit of $73.2 million for the period ended March 31 despite having a sizable net loss of $54.4 million.

The problem for companies like Trulieve and Curaleaf is that the cost-cutting efforts would need to be significant for them to get anywhere near posting a true profit. Last quarter, Trulieve's operating loss totaled $13.1 million, with selling, general, and administrative (SG&A) expenses alone totaling $132.1 million, representing 88% of the company's gross profit. That doesn't leave much left over to cover taxes, interest expenses, impairment charges, and any other expenses. Curaleaf had a bit more breathing room with SG&A of $112.2 million, accounting for 70% of gross profit, but there are still a lot of expenses to cut from there as well.

As a result, it could be a long road before multistate operators such as Trulieve and Curaleaf get close to reporting true accounting profits.

Without growth, the cannabis industry may have difficulty attracting investors

The cannabis industry appeals primarily to growth investors for its long-term potential. According to analysts from Grand View Research, the U.S. cannabis market alone could expand at a compound annual growth rate of more than 14% until the end of the decade. 

As more markets open up and if the federal government legalizes marijuana in the future, there could be a plenty of opportunities for Trulieve, Curaleaf, and other cannabis companies to pursue. However, cutting costs and shutting operations puts these cannabis companies at odds with the growth they'll need to attract investors.

Should you invest in pot stocks today?

While it's a positive sign that cannabis companies are reducing costs and trying to slim down their operations, it's a process that could take years. And in the meantime, their growth rates could decline, making them less attractive stocks for growth investors to pursue.

Unless you can afford to invest money into a business and be comfortable with the risk involved within the industry, then you should avoid pot stocks until the prospects for both profitability and growth improve. And that might not be until U.S. legalization, which could be years away from becoming a reality, if ever.