Last Week’s Viridian Chart of the Week explored the relative capital intensity of cannabis compared to other industries that cannabis, including alcohol, tobacco, pharmaceuticals, and CPG. The results established that cannabis is the most capital-intensive of these industries in terms of incremental capital required per dollar of additional sales.

The graph below takes this analysis one step further. It explores the degree to which punitive 280e taxes, high leverage, and high capital intensity restrict the internally financeable growth potential of the industry.

Our analysis follows the general approach of Robert Higgins in his seminal article “How Much Growth Can a Firm Afford?” Financial Management, 1977, but departs from his analysis in two important respects. Higgins postulated that an increase in equity from earnings could also allow an increase in debt to keep the capital structure ratios constant. In contrast, we have assumed no incremental debt financing. Higgins also thought that depreciation would need to be matched with capex to keep the book value of fixed assets constant. We have assumed that in the short run, firms can utilize the depreciation cash flow to fund growth, a reasonable assumption for firms with relatively new capital plants.

To generate the numbers in the chart, we …

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