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Investors are always looking for growth in small-cap stocks like Orient Cement Limited (NSE:ORIENTCEM), with a market cap of ₹22b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into ORIENTCEM here.

ORIENTCEM’s Debt (And Cash Flows)

Over the past year, ORIENTCEM has maintained its debt levels at around ₹13b – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at ₹279m , ready to be used for running the business. Additionally, ORIENTCEM has generated cash from operations of ₹2.8b over the same time period, resulting in an operating cash to total debt ratio of 22%, signalling that ORIENTCEM’s debt is appropriately covered by operating cash.

Does ORIENTCEM’s liquid assets cover its short-term commitments?

Looking at ORIENTCEM’s ₹5.1b in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of ₹4.6b, leading to a current ratio of 0.9x. The current ratio is calculated by dividing current assets by current liabilities.

Is ORIENTCEM’s debt level acceptable?

With total debt exceeding equity, ORIENTCEM is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether ORIENTCEM is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ORIENTCEM's, case, the ratio of 1.61x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ORIENTCEM’s low interest coverage already puts the company at higher risk of default.

Next Steps:

ORIENTCEM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for ORIENTCEM's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Orient Cement to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for ORIENTCEM’s future growth? Take a look at our free research report of analyst consensus for ORIENTCEM’s outlook.

2. Valuation: What is ORIENTCEM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ORIENTCEM is currently mispriced by the market.

3. 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 editorial-team@simplywallst.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.