Orion Minerals Limited (ASX:ORN) is a small-cap stock with a market capitalization of AU$55.47M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that ORN is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into ORN here.

Does ORN generate enough cash through operations?

In the previous 12 months, ORN’s rose by about AU$7.78M comprising of short- and long-term debt. With this ramp up in debt, ORN’s cash and short-term investments stands at AU$3.86M for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of ORN’s operating efficiency ratios such as ROA here.

Can ORN pay its short-term liabilities?

At the current liabilities level of AU$1.18M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.63x. However, a ratio greater than 3x may be considered as too high, as ORN could be holding too much capital in a low-return investment environment.

Does ORN face the risk of succumbing to its debt-load?

ORN is a relatively highly levered company with a debt-to-equity of 90.20%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since ORN is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

ORN’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how ORN has been performing in the past. I recommend you continue to research Orion Minerals to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.