Is China Telecom (HKG:728) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies China Telecom Corporation Limited (HKG:728) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does China Telecom Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 China Telecom had CN¥11.2b of debt, an increase on CN¥9.20b, over one year. But on the other hand it also has CN¥89.8b in cash, leading to a CN¥78.6b net cash position.

How Strong Is China Telecom's Balance Sheet?

According to the last reported balance sheet, China Telecom had liabilities of CN¥310.8b due within 12 months, and liabilities of CN¥82.2b due beyond 12 months. On the other hand, it had cash of CN¥89.8b and CN¥67.3b worth of receivables due within a year. So its liabilities total CN¥235.9b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because China Telecom is worth a massive CN¥664.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, China Telecom also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for China Telecom

The good news is that China Telecom has increased its EBIT by 8.5% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if China Telecom can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While China Telecom has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, China Telecom actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While China Telecom does have more liabilities than liquid assets, it also has net cash of CN¥78.6b. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in CN¥43b. So is China Telecom's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for China Telecom you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.