Two important questions to ask before you buy Mondi plc (LON:MNDI) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, Mondi is currently valued at UK£8.1b. Today we will examine Mondi’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
Is Mondi generating enough cash?
Mondi’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Mondi to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Mondi’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Mondi also generates a positive free cash flow. However, the yield of 2.34% is not sufficient to compensate for the level of risk investors are taking on. This is because Mondi’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Mondi have a favourable cash flow trend?Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at Mondi’s expected operating cash flows. In the next couple of years, a double-digit growth in operating cash of 40% is expected. The future seems buoyant if Mondi can maintain its levels of capital expenditure as well. Below is a table of Mondi’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year||+3 year|
|Operating Cash Flow (OCF)||€1.2b||€1.6b||€1.6b||€1.8b|
|OCF Growth Year-On-Year||28%||2.7%||7.0%|
|OCF Growth From Current Year||31%||40%|
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Mondi as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Mondi to get a better picture of the company by looking at:
- 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.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Mondi’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through 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 email@example.com.