Predicting financial distress in small-cap firms remains inconsistent, as reliance on individual classical models often yields conflicting signals. This study addresses this methodological issue by introducing a novel Composite Financial Health Index (CFHI), an integrated approach that combines the Altman Z-Score, Springate S-Score, Zmijewski X-Score, and Grover G-Score. Using the CFHI on a longitudinal dataset of 380 firm-year observations from Indian small-cap manufacturing companies (2015–2024), we first observe significant classification discrepancies among the standalone models, with distress rates ranging from 6.3% to 39.7% for the same firms. The CFHI offers a solution by providing a consistent, three-tier classification, highlighting a significant ‘grey zone’ (45% of cases) of moderate vulnerability that binary models tend to miss. Validation against key financial indicators shows that the CFHI depends mainly on liquidity and market valuation (β > 0.45) and reveals an important insight: for small caps, balance-sheet leverage (TL/TA) is a vital risk factor, unlike capital-structure leverage (D/E). The model explains over 73% of the variation in financial health, providing researchers with a reliable composite measure and offering investors and regulators a more sophisticated, detailed tool for risk analysis in emerging-market small-cap firms.