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Investors are always looking for growth in small-cap stocks like National Veterinary Care Ltd (ASX:NVL), with a market cap of AU$127m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into NVL here.

Does NVL Produce Much Cash Relative To Its Debt?

NVL has built up its total debt levels in the last twelve months, from AU$28m to AU$53m , which includes long-term debt. With this increase in debt, NVL's cash and short-term investments stands at AU$13m , ready to be used for running the business. Additionally, NVL has produced cash from operations of AU$7.4m during the same period of time, resulting in an operating cash to total debt ratio of 14%, indicating that NVL’s operating cash is less than its debt.

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

With current liabilities at AU$27m, it seems that the business may not be able to easily meet these obligations given the level of current assets of AU$22m, with a current ratio of 0.83x. The current ratio is calculated by dividing current assets by current liabilities.

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

With a debt-to-equity ratio of 57%, NVL can be considered as an above-average leveraged 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 NVL 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 NVL's, case, the ratio of 6.17x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

NVL’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how NVL has been performing in the past. You should continue to research National Veterinary Care to get a more holistic view of the stock by looking at:

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

2. Valuation: What is NVL 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 NVL 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.