Does Mondelez International Inc’s (NASDAQ:MDLZ) Debt Level Pose A Problem?

Mondelez International Inc (NASDAQ:MDLZ), a large-cap worth US$64.4b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Mondelez International’s financial liquidity and leverage to give you an idea of Mondelez International’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into MDLZ here.

Check out our latest analysis for Mondelez International

How much cash does MDLZ generate through its operations?

MDLZ has built up its total debt levels in the last twelve months, from US$19.1b to US$20.4b – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$1.4b , ready to deploy into the business. Additionally, MDLZ has generated cash from operations of US$3.7b over the same time period, resulting in an operating cash to total debt ratio of 18%, indicating that MDLZ’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MDLZ’s case, it is able to generate 0.18x cash from its debt capital.

Can MDLZ meet its short-term obligations with the cash in hand?

Looking at MDLZ’s most recent US$15.5b liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.56x.

NasdaqGS:MDLZ Historical Debt November 13th 18
NasdaqGS:MDLZ Historical Debt November 13th 18

Is MDLZ’s debt level acceptable?

MDLZ is a relatively highly levered company with a debt-to-equity of 80%. 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 an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if MDLZ’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In MDLZ’s case, the ratio of 9.03x suggests that interest is well-covered. Large-cap investments like MDLZ are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

MDLZ’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven’t considered other factors such as how MDLZ has been performing in the past. You should continue to research Mondelez International to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for MDLZ’s future growth? Take a look at our free research report of analyst consensus for MDLZ’s outlook.
  2. Valuation: What is MDLZ 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 MDLZ 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.