Tilray Brands Missed on Revenue in Q3, but This Is the More Concerning Number for Investors

Canadian cannabis producer Tilray Brands (TLRY -0.28%) reported its most recent earnings numbers last week. The company showed progress in increasing its top line, although challenges with the bottom line persist.

The headline was that the company missed revenue expectations, but there's a bigger issue for investors to consider -- one that goes beyond just its net loss, and that can create problems for investors down the road.

Tilray's cash burn is intensifying

In the third quarter of fiscal 2024, which ended Feb. 29, Tilray reported revenue of $188.3 million, about 30% more than a year earlier. But analysts were expecting $198.3 million, as the company benefited from a boost in revenue due to recent acquisitions.

Tilray, without substantial impairment charges this time around, was able to significantly narrow its operating loss from $1.2 billion a year ago to just $82.1 million in the third quarter. Based on those numbers, you could argue that the company might not have had that bad of a performance in its latest quarter.

But an important number that investors need to look at when reviewing a cannabis company's earnings report is its operating cash flow. It's crucial for this number to be trending in the right direction, with the goal of becoming positive. Ideally, it would already be positive. But given the lack of profitability in the cannabis industry and high levels of competition -- particularly in the Canadian cannabis market -- many companies struggle with cash flow.

In Tilray's case, its rate of cash burn has been increasing. During the nine-month period ended Feb. 29, the company burned through $61.6 million from its day-to-day operations. That is considerably higher than the $35.7 million that it used during the comparable period a year earlier.

Could things get worse for the company?

If a company is burning cash, that's a sign that its business might not be sustainable. Although non-cash items such as impairment and amortization can reduce accounting income, cash flow can be a more immediate sign of a company's financial health. And if operating cash flow is negative, that means a business is draining its resources and could need a cash infusion through a stock offering in the future.

As of the end of the quarter, Tilray reported $146.3 million in cash and cash equivalents along with $79.6 million in marketable securities, for a total of $225.9 million in liquid assets. With sufficient resources on hand, its current burn rate suggests it might not need an offering anytime soon.

But what complicates things is that the company has been aggressive with respect to growth in the past. It has acquired other cannabis companies to strengthen its market share in Canada. It has been acquiring beverage companies to expand its liquor operations, and it's eyeing a big opportunity in the German cannabis market after regulators there recently passed significant marijuana reform.

Those are all ways in which the company could end up spending more money, all in the hope of becoming a larger player in the global cannabis market.

A key goal for the business in the current fiscal year was to generate positive adjusted cash flow. Tilray is now backing away from that target, blaming it on a delay on when it expects to collect cash on asset sales.

Free cash flow is what a company generates after factoring in its operating cash flow and its capital expenditures. But investors should also remember Tilray is referring to an adjusted free cash flow calculation, meaning it leaves out some sources of cash drain.

While it might be a positive sign if it can reach ultimately reach its goal, it's important to look at the unadjusted figures. Tilray's operating cash flow, an unadjusted number, doesn't look good. And there are reasons it could look worse in the future as management continues to pursue growth opportunities.

Should you stay away from Tilray Brands stock?

Shares of Tilray have been falling since the release of its latest earnings numbers; on a year-to-date basis they are down more than 20%. With underwhelming financials and an unclear path for the company in the long run -- the Canadian cannabis market is highly competitive, and the U.S. might not legalize marijuana anytime soon -- this has become a highly speculative investment.

For the average investor, this is a stock that's simply too risky to be holding. Unless you're willing to take on significant risk and be incredibly patient, you're probably better off looking at other growth stocks.