💸 High Impact

DPO: The Metric You Need To Know

The What - This week, we’re examining cash flow metrics. Yesterday, we looked at Days Receivables Outstanding and explored how this metric can predict future challenges companies could experience regarding liquidity. As the cannabis industry matures, additional financial metrics become essential. One such metric is Days Payable Outstanding (DPO), which provides insight into how efficiently companies manage their accounts payable. This post will explore what DPO is, why it’s essential, and how cannabis multi-state operators (MSOs) stack up against each other.  This metric is tricky; it can be both good and bad, and it requires a deeper look to decide what the ratio tells an investor. 

What is Days Payable Outstanding?

DPO measures the average days a company takes to pay its suppliers after a purchase. It is calculated by dividing accounts payable by the cost of goods sold (COGS) and multiplying by the number of days in the period. A higher DPO indicates that a company is taking longer to pay its suppliers, which can signify good cash flow management if done strategically. But, here is the nuance: if a company pays its suppliers late due to a credit crunch, that is a warning sign. This analysis takes some discretion as an analyst. For example, if you are looking at Walmart and you see they have increased their days of account payables, you are happy as a shareholder as they are forcing suppliers to carry them and better terms. If you are looking at a small company, this could be a sign they have a cash crunch. Typically, I prefer that, over time, companies improve their days payable and make them shorter. 

Why is DPO Important?

Understanding DPO is essential for several reasons:

• Cash Flow Management: A higher DPO allows a company to hold onto its cash longer, improving its liquidity and enabling better cash flow management. But, it also could be a sign of having trouble paying its bills.

• Supplier Relationships: Efficient payables management positively reflects a company's financial health and ability to manage supplier relationships.

• Liquidity: Companies with a higher DPO have better liquidity, as they can use their cash for other immediate needs rather than quickly paying off suppliers. But, this could also be a sign of cash flow problems.

• Performance Benchmarking: DPO provides a metric to compare how well companies manage their payables against industry peers, highlighting best practices and improvement areas. It also can be a sign of challenge, so you have to use other ratios to decide on the company's cash flow performance.

Ranking of MSOs by DPO

Below is the number of days each company has taken to pay its suppliers over the last twelve months. A higher number is generally preferred for the company, but I have ranked them as lower being better, as it shows strength. Different analysts would debate this view, but you pay your bills quickly if you are doing well as a company.

The Why - If you hope to review this after each MSO's earnings report, you will likely need to wait for a few days until systems like Capital IQ, Yahoo Finance, etc., update their earnings data. You will then have to calculate this ratio yourself. However, we will do this for our readers in the future after earnings and share how companies are improving or falling back with their payables management.

Big Takeaway

I like companies that are improving how quickly they pay their suppliers. I prefer that they improve and pay quicker each year. Many analysts debate this and disagree with me; they feel stretching account payable terms is a sign of strength. This is good information, and the investors can interoperate how they wish. I believe that small cap cannabis companies are not Walmart, and investors should prefer quicker payment times of account payables. 

Check out our other blogs to help everyone prepare for earnings on topics like:

• Selling, General, and Administrative Margin

• Gross Profit Margin

• EBITDA Margin

• Total Liabilities to Total Assets Ratio

• Dilution

• Levered Free Cash Flow Margin

• Current Ratio

• Day Sales Outstanding

• Days Inventory Outstanding

📈 Dog Walkers

New Europe-Focused Cannabis Companies Seek Listings

European cannabis companies, including Grow Group and Wellford Medical from London, and Lisbon-based Somai Pharmaceuticals, are planning Nasdaq IPOs in early 2025. This is driven by potential regulatory changes in the U.S. and Germany, with Germany decriminalizing cannabis possession and small-scale home cultivation, enhancing the European cannabis market's appeal. Lets hope by the time these come around we have meaningful change in the U.S. cannabis landscape and once again we aren’t left out in the cold.

Illegal Cannabis Seized in California State Parks Crackdown

California law enforcement, including the Unified Cannabis Enforcement Task Force (UCETF), seized thousands of pounds of illegal cannabis near state parks. The operations targeted sites like Saddleback Butte State Park, removing over 5,200 illegal plants and mitigating environmental damage while protecting the legal cannabis market.

Safe Harbor Financial Submits Comments on Cannabis Rescheduling

Safe Harbor Financial (NASDAQ: SHFS) has submitted comments to the Justice Department regarding the rescheduling of cannabis. The company's input underscores the financial sector's interest in the regulatory changes impacting the cannabis industry. These comments were clear, concise, and purpose driven and was a delighful addition to the federal register.

🗞️ The News

TDR Exclusive: Matt Hawkins Shares Update on Institutional Investments In Cannabis Stocks

How to Analyze Biotech Small Caps

How Governments Bitcoin Holdings Influence the Market

Biden Tells NAACP He Is ‘Making Sure’ People Aren’t Jailed For Marijuana Possession

FDA And FTC Issue More Warning Letters To Hemp Businesses Allegedly Marketing Delta-8 THC Products That Appeal To Children

📭 Research

Initiating Coverage: Green Thumb Industries - Download Here

Reconfirming Buy Rating: MariMed - Download Here

Initiating Coverage Of Verano Holdings Corp. - Download Here

Initiating Coverage: TerrAscend - Download Here

📺 YouTube

Which Five Small Cap Stocks Would We Buy?

What we covered:

✅ Join us for an exclusive interview with Matt Hawkins, the Founder and Managing Partner of Entourage Effect Capital. The firm manages a private cannabis fund, which gives Matt a great pulse on the current institutional view of marijuana stocks.

TDR Trade to Black podcast co-hosts Shadd Dales, and Anthony Varrell will ask Matt to chime in on the following topics regarding the current institutional investors' views of Cannabis stocks:

1. Trends he sees in institutional investors' view of investing in Cannabis stocks.

2. Why do share prices not match the improvement in Cannabis stock's financials and underlying fundamentals?

3. How is he positioning his investment focus in the current investment climate?

4. What misconceptions does he feel surround the potential rescheduling of Cannabis?

Video: https://www.youtube.com/watch?v=c7HbVrhzgYc