Those who have remained invested in Canada's burgeoning cannabis sector have been well rewarded in recent years, with prices of most producers increasing by triple-digit percentages on an annual (and sometimes on a monthly) basis.
These increases have been driven largely by outsized growth expectations for the green commodity, with upcoming legalization this summer spurring thoughts of continued triple-digit growth rates and a perpetually rising sector valuation.
Should a cannabis investor actually read any of the financial statements put forward by producers, one will notice that companies, almost across the board, have managed to produce gross margins in excess of 100%.
An astute investor might ask how it may be possible for any company to report a margin of more than 100%. After all, this would assume negative production costs or some sort of massive accounting adjustment.
As it turns out, the financial reporting methodology used by Canadian cannabis firms (IFRS) allows companies to book the increase in the value created by inventory not yet sold (i.e. the marijuana plants) as these assets grow.
That's right, the marijuana plants which are still in the ground and are not yet sold are allowed to be booked at its current value, assuming a stable sales price and cost of goods sold.
The problems which are inevitably going to come out of this reporting methodology are many; write-downs stemming from unsaleable product, a changing sales price down the road, increasing costs and taxation levels, and a slough of other probable factors which will alter current assumptions remain. Investors, thus, must remain extra vigilant in assessing the financial statements of cannabis producers, now more than ever.
Invest wisely, my friends.
