Oriental Hotels Limited (NSEI:ORIENTHOT) is a small-cap stock with a market capitalization of ₹6.74B. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into ORIENTHOT here.
Does ORIENTHOT generate enough cash through operations?
ORIENTHOT has sustained its debt level by about ₹3,223.2M over the last 12 months comprising of short- and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹134.6M for investing into the business. On top of this, ORIENTHOT has generated cash from operations of ₹423.0M during the same period of time, resulting in an operating cash to total debt ratio of 0.13x, indicating that ORIENTHOT’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ORIENTHOT’s case, it is able to generate 0.13x cash from its debt capital.
Can ORIENTHOT meet its short-term obligations with the cash in hand?
Looking at ORIENTHOT’s most recent ₹885.7M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of ₹881.3M, with a current ratio of 1x below the prudent level of 3x.
Can ORIENTHOT service its debt comfortably?
With a debt-to-equity ratio of 78.18%, ORIENTHOT can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether ORIENTHOT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In ORIENTHOT’s, case, the ratio of 0.88x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Are you a shareholder? ORIENTHOT’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may change. I suggest keeping on top of market expectations for ORIENTHOT’s future growth on our free analysis platform.