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Is Mondi plc’s (LON:MNDI) Balance Sheet A Threat To Its Future?

Blake Harford

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Mondi plc (LON:MNDI), a large-cap worth UK£9.1b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to their continued success lies in its financial health. Let’s take a look at Mondi’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into MNDI here.

Check out our latest analysis for Mondi

How much cash does MNDI generate through its operations?

Over the past year, MNDI has ramped up its debt from €1.6b to €2.5b , which accounts for long term debt. With this increase in debt, MNDI currently has €54m remaining in cash and short-term investments , ready to deploy into the business. On top of this, MNDI has generated €1.2b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 50%, indicating that MNDI’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MNDI’s case, it is able to generate 0.5x cash from its debt capital.

Can MNDI pay its short-term liabilities?

With current liabilities at €1.6b, it appears that the company has been able to meet these obligations given the level of current assets of €2.3b, with a current ratio of 1.39x. Usually, for Forestry companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

LSE:MNDI Historical Debt February 14th 19

Is MNDI’s debt level acceptable?

With a debt-to-equity ratio of 71%, MNDI can be considered as an above-average leveraged company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether MNDI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In MNDI’s case, the ratio of 21.51x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes MNDI and other large-cap investments thought to be safe.

Next Steps:

MNDI’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around MNDI’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how MNDI has been performing in the past. You should continue to research Mondi to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for MNDI’s future growth? Take a look at our free research report of analyst consensus for MNDI’s outlook.
  2. Valuation: What is MNDI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MNDI is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.