Health Check: How Prudently Does Summit Therapeutics (NASDAQ:SMMT) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Summit Therapeutics Inc. (NASDAQ:SMMT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Summit Therapeutics

What Is Summit Therapeutics's Debt?

As you can see below, Summit Therapeutics had US$24.5m of debt at September 2024, down from US$100.0m a year prior. However, it does have US$486.9m in cash offsetting this, leading to net cash of US$462.4m.

How Healthy Is Summit Therapeutics' Balance Sheet?

The latest balance sheet data shows that Summit Therapeutics had liabilities of US$59.0m due within a year, and liabilities of US$5.92m falling due after that. Offsetting these obligations, it had cash of US$486.9m as well as receivables valued at US$660.0k due within 12 months. So it actually has US$422.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Summit Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Summit Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Summit Therapeutics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Given its lack of meaningful operating revenue, Summit Therapeutics shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Summit Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Summit Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$128m and booked a US$197m accounting loss. But the saving grace is the US$462.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 3 warning signs we've spotted with Summit Therapeutics (including 1 which shouldn't be ignored) .

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.