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The data now confirms that cannabis is more capital-intensive than other similar industries. A new report from Viridian Capital Advisors looked at the capital needs of cannabis companies versus four other industries. Viridian chose to compare cannabis to other companies and sectors that would be likely acquirers of cannabis companies upon federal legalization. They included tobacco, alcoholic beverages, pharmaceuticals, and consumer products.

In the chart, the cannabis section is made up of nine multistate operators with market caps over $100 million. The rest of the group are as follows:

• Tobacco includes British American Tobacco (BTI: NYSE), Altria (MO: NYSE), Phillip Morris International (PM: NYSE), and Japan Tobacco (JAPAF: NYSE).
• Alcoholic beverages include ABEV (ABEV: NYSE), Brown-Forman (BF.B: NYSE), Constellation Brands (STZ.B: NYSE), Diageo (DEO: NYSE), and Molson Coors (TAP: NYSE).
• Pharmaceuticals include Johnson & Johnson (JNJ: NYSE), Pfizer (PFE: NYSE), Merck & CO. (MRK: NYSE), and Eli Lilly (LLY: NYSE).
• Consumer products include Colgate Palmolive (CL: NYSE), Mondeles (MDLZ: NYSE), Proctor & Gamble (PG: NYSE), and Unilever (UL: NYSE).

To understand its chart, Viridian explained that the capital intensity of each group (depicted by the green bar) is measured by its aggregate next 12-month consensus revenue estimates divided by aggregate capital employed (book equity + total debt –cash). In other words, the lower the bar, the more capital the industry needs to generate $1 in sales.

“The capital intensity issue is a big one for cannabis,” Viridian analyst Frank Colombo said. “I suspect that some of the operators who have just finished big capex/acqs might argue that they are set up for years of growth without much need for additional capital but the uniformity of the numbers across the group argues differently. I have also used forward 12-month sales to account for this. The idea is that your capital comes ahead of your sales.”

Granted, most cannabis companies were likely aware of this fact, but now there’s proof. Much of the problem can be tied to the status of cannabis as a federally illegal product. The MSOs represented in the chart have multiple overlapping operations because their products can’t cross state lines. This duplication of operations leads to inefficient businesses that end up spending more money than their peers on the legal side of the equation.

However, if cannabis gets rescheduled or fully legalized at the federal level, then those costs will likely come down. MSOs could potentially centralize operations to save money and duplicated roles could be eliminated.

“The good news, as I tried to point out, is that when and if interstate commerce happens it will help this issue significantly,” added Colombo. “The ability to reorganize activities on a national/international scale should allow some economies of scale from a capital point of view.”

Unfortunately, many cannabis companies are finding that the need to keep feeding the capital beast is crushing them. Huge debt bills are coming due and getting pushed out. Companies strapped for cash aren’t finding investors willing to take the risk.

“The capital shortage matched with capital intensity makes rapid growth impossible,” Colombo concluded.