Does Mondi (LON: MNDI) have a healthy track record?


Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Mondi plc (LON: MNDI) uses debt. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest review for Mondi

What is Mondi’s debt?

As you can see below, Mondi had € 2.09 billion in debt in June 2021, up from € 2.52 billion the year before. On the other hand, it has € 296.0 million in cash, leading to a net debt of around € 1.80 billion.

LSE: MNDI History of debt to equity September 29, 2021

How strong is Mondi’s balance sheet?

The latest balance sheet data shows Mondi had debts of € 1.63 billion due within one year, and debts of € 2.69 billion maturing thereafter. In return, he had € 296.0 million in cash and € 1.33 billion in receivables due within 12 months. Its liabilities therefore amount to € 2.69 billion more than the combination of its cash and short-term receivables.

Mondi has a very large market capitalization of 10.3 billion euros, so he could most likely raise cash to improve his balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.

We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

Mondi has a low net debt to EBITDA ratio of just 1.4. And its EBIT covers its interest costs a whopping 10.5 times. So we’re pretty relaxed about its ultra-conservative use of debt. But the bad news is that Mondi has seen its EBIT drop 12% over the past twelve months. If this rate of decline in profits continues, the company could find itself in a difficult situation. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Mondi can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Mondi has recorded free cash flow of 55% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.

Our point of view

Based on our analysis, Mondi’s interest coverage should indicate that she won’t have too many problems with her debt. However, our other observations were not so encouraging. In particular, the growth rate of EBIT gives us shivers. When we consider all of the factors mentioned above, we feel a little cautious about Mondi’s use of debt. While debt has its advantage in terms of potential higher returns, we think shareholders should definitely consider how leverage levels might make the stock riskier. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example – Mondi has 2 warning signs we think you should be aware.

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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