Is Chunghwa Telecom (TWSE:2412) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Chunghwa Telecom Co., Ltd. (TWSE:2412) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Chunghwa Telecom

How Much Debt Does Chunghwa Telecom Carry?

As you can see below, Chunghwa Telecom had NT$32.3b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has NT$36.3b in cash to offset that, meaning it has NT$3.94b net cash.

How Healthy Is Chunghwa Telecom's Balance Sheet?

According to the last reported balance sheet, Chunghwa Telecom had liabilities of NT$80.0b due within 12 months, and liabilities of NT$56.5b due beyond 12 months. On the other hand, it had cash of NT$36.3b and NT$26.2b worth of receivables due within a year. So it has liabilities totalling NT$74.0b more than its cash and near-term receivables, combined.

Of course, Chunghwa Telecom has a titanic market capitalization of NT$973.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Chunghwa Telecom boasts net cash, so it's fair to say it does not have a heavy debt load!

Chunghwa Telecom's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Chunghwa Telecom can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Chunghwa 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, Chunghwa 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

We could understand if investors are concerned about Chunghwa Telecom's liabilities, but we can be reassured by the fact it has has net cash of NT$3.94b. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in NT$79b. So we don't think Chunghwa Telecom's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Chunghwa Telecom is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.