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Is Denali Therapeutics Inc.'s (NASDAQ:DNLI) Stock Price Struggling As A Result Of Its Mixed Financials?

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It is hard to get excited after looking at Denali Therapeutics' (NASDAQ:DNLI) recent performance, when its stock has declined 34% over the past month. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Denali Therapeutics' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Denali Therapeutics

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Denali Therapeutics is:

5.2% = US$58m ÷ US$1.1b (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.05 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Denali Therapeutics' Earnings Growth And 5.2% ROE

At first glance, Denali Therapeutics' ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 18%. As a result, Denali Therapeutics' flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Denali Therapeutics' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 23% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Denali Therapeutics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Denali Therapeutics Making Efficient Use Of Its Profits?

Summary

On the whole, we feel that the performance shown by Denali Therapeutics can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink slightly in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. 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.