David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Summit Therapeutics Inc. (NASDAQ:SMMT) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Summit Therapeutics's Debt?

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. However, its balance sheet shows it holds US$486.9m in cash, so it actually has US$462.4m net cash.

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 this, it had US$486.9m in cash and US$660.0k in receivables that were due within 12 months. So it can boast 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. 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 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're focused on the future you can check out this free report showing analyst profit forecasts.

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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Summit Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. 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. 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. For example Summit Therapeutics has 4 warning signs (and 3 which are concerning) we think you should know about.

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.