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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Denali Therapeutics Inc. (NASDAQ:DNLI), with a market cap of US$2.1b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine DNLI’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Denali Therapeutics's financial health, so you should conduct further analysis into DNLI here.
Is DNLI’s debt level acceptable?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For DNLI, the debt-to-equity ratio is zero, meaning that the company has no debt. It has been operating its business with zero debt and utilising only its equity capital. Investors' risk associated with debt is virtually non-existent with DNLI, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does DNLI’s liquid assets cover its short-term commitments?
Since Denali Therapeutics doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at DNLI’s US$43m in current liabilities, the company has been able to meet these commitments with a current assets level of US$500m, leading to a 11.55x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors.
DNLI has no debt as well as ample cash to cover its short-term liabilities. Its safe operations reduces risk for the company and its investors, but some degree of debt could also ramp up earnings growth and operational efficiency. This is only a rough assessment of financial health, and I'm sure DNLI has company-specific issues impacting its capital structure decisions. I recommend you continue to research Denali Therapeutics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DNLI’s future growth? Take a look at our free research report of analyst consensus for DNLI’s outlook.
- Historical Performance: What has DNLI's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.