Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Mondi plc (LON:MNDI) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, its financial health remains the key to continued success. Today we will look at Mondi’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into MNDI here.
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 includes long-term debt. With this growth in debt, MNDI currently has €54m remaining in cash and short-term investments for investing into the business. Additionally, MNDI has generated cash from operations of €1.2b over the same time period, resulting in an operating cash to total debt ratio of 50%, indicating that MNDI’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MNDI’s case, it is able to generate 0.5x cash from its debt capital.
Does MNDI’s liquid assets cover its short-term commitments?
Looking at MNDI’s €1.6b in current liabilities, the company has been able to meet these commitments with a current assets level of €2.3b, leading to a 1.39x current account ratio. For Forestry companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is MNDI’s debt level acceptable?
MNDI is a relatively highly levered company with a debt-to-equity of 71%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. By measuring how many times MNDI’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MNDI, the ratio of 21.51x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like MNDI are considered a risk-averse investment.
Although MNDI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around MNDI’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure MNDI has company-specific issues impacting its capital structure decisions. I recommend you continue to research Mondi to get a more holistic view of the large-cap by looking at:
- 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.
- 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.
- 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 firstname.lastname@example.org.