Here's Why We're Watching Summit Therapeutics' (NASDAQ:SMMT) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Summit Therapeutics (NASDAQ:SMMT) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Summit Therapeutics

How Long Is Summit Therapeutics' Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Summit Therapeutics last reported its balance sheet in December 2021, it had zero debt and cash worth US$72m. Importantly, its cash burn was US$73m over the trailing twelve months. So it had a cash runway of approximately 12 months from December 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

How Is Summit Therapeutics' Cash Burn Changing Over Time?

Whilst it's great to see that Summit Therapeutics has already begun generating revenue from operations, last year it only produced US$1.8m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by a very significant 50%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Summit Therapeutics is building its business over time.

How Hard Would It Be For Summit Therapeutics To Raise More Cash For Growth?

Since its cash burn is moving in the wrong direction, Summit Therapeutics shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of US$173m, Summit Therapeutics' US$73m in cash burn equates to about 42% of its market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

How Risky Is Summit Therapeutics' Cash Burn Situation?

Summit Therapeutics is not in a great position when it comes to its cash burn situation. Although we can understand if some shareholders find its cash runway acceptable, we can't ignore the fact that we consider its cash burn relative to its market cap to be downright troublesome. Summing up, we think the Summit Therapeutics' cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Summit Therapeutics (2 are potentially serious!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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.