Advertisement
U.S. markets closed
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • Dow 30

    39,807.37
    +47.29 (+0.12%)
     
  • Nasdaq

    16,379.46
    -20.06 (-0.12%)
     
  • Russell 2000

    2,124.55
    +10.20 (+0.48%)
     
  • Crude Oil

    83.11
    -0.06 (-0.07%)
     
  • Gold

    2,254.80
    +16.40 (+0.73%)
     
  • Silver

    25.10
    +0.18 (+0.74%)
     
  • EUR/USD

    1.0778
    -0.0015 (-0.14%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • GBP/USD

    1.2621
    -0.0001 (-0.01%)
     
  • USD/JPY

    151.3400
    -0.0320 (-0.02%)
     
  • Bitcoin USD

    70,240.33
    +607.65 (+0.87%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,426.38
    +258.31 (+0.64%)
     

Is Surface Oncology (NASDAQ:SURF) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Surface Oncology, Inc. (NASDAQ:SURF) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Surface Oncology

What Is Surface Oncology's Net Debt?

The image below, which you can click on for greater detail, shows that Surface Oncology had debt of US$14.1m at the end of June 2021, a reduction from US$15.5m over a year. However, it does have US$164.3m in cash offsetting this, leading to net cash of US$150.2m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Surface Oncology's Balance Sheet?

We can see from the most recent balance sheet that Surface Oncology had liabilities of US$18.7m falling due within a year, and liabilities of US$38.7m due beyond that. On the other hand, it had cash of US$164.3m and US$2.57m worth of receivables due within a year. So it actually has US$109.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Surface Oncology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Surface Oncology boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Surface Oncology made a loss at the EBIT level, last year, it was also good to see that it generated US$22m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Surface Oncology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Surface Oncology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Surface Oncology actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Surface Oncology has net cash of US$150.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$31m, being 142% of its EBIT. So we don't think Surface Oncology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Surface Oncology you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Advertisement