Analysts have a range of choices when valuing cannabis companies. Viridian commonly uses Discounted Cash Flow Analysis, Public Company Comparables, and M&A Precedent Transactions to value both small private concerns as well as larger public companies.
But, consider the task of valuing a company where the current asset value is close to or even below the value of the debt. The companies in the chart all have total liabilities to market cap in excess of 9x, a good measure of distress. In addition, our initial assigned asset value for all of them, except Cannabist (OTC: CBSTF), is lower than the debt.
We use the Black-Scholes model as our valuation engine since none of these companies are likely to pay a dividend in the near future.
Note that six of the eleven companies have option valuations below their current market caps, while five are considerably higher.
It is natural to view volatility as a negative, but investors should remember that the opposite is true. Distressed cannabis equities have two critical assets that don’t appear on the balance sheet: time and hope. With so many potential positive catalysts on the horizon, option valuation techniques are an important tool to consider, particularly for those higher-risk equities.
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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