Summit Therapeutics (NASDAQ:SMMT) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Summit Therapeutics Inc. (NASDAQ:SMMT) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

Check out our latest analysis for Summit Therapeutics

How Much Debt Does Summit Therapeutics Carry?

The image below, which you can click on for greater detail, shows that Summit Therapeutics had debt of US$24.5m at the end of September 2024, a reduction from US$100.0m over a year. But it also has US$486.9m in cash to offset that, meaning it has US$462.4m net cash.

A Look At Summit Therapeutics' Liabilities

According to the last reported balance sheet, Summit Therapeutics had liabilities of US$59.0m due within 12 months, and liabilities of US$5.92m due beyond 12 months. On the other hand, it had cash of US$486.9m and US$660.0k worth of receivables due within a year. So it can boast US$422.6m more liquid assets than total liabilities.

This surplus suggests that Summit Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Summit Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Summit Therapeutics 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.

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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Summit Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$128m of cash and made a loss of US$197m. 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. 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. We've identified 4 warning signs with Summit Therapeutics (at least 3 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.