You are given Pellora Pharma's financials: EBITDA Rs 420 crore, debt Rs 700 crore, receivable days up from 95 to 130. Find the business drivers and credit issues, write your management meeting questions, and work out how much more debt it can take at a 3.0x leverage ceiling.

On reported EBITDA Pellora has Rs 560 crore of headroom under a 3.0x ceiling, but I would lend about Rs 272 crore until the receivables stretch is explained. Receivables rose Rs 244 crore, and only Rs 52 crore of that is growth; Rs 192 crore is customers paying later. Stripping half of it out of profit cuts EBITDA to Rs 324 crore and the headroom to Rs 272 crore.

Start with how the money is made before touching ratios. A branded and generic drug maker earns on three drivers: volumes through its sales channel, prices that regulators and buyers can push down, and the approvals that let its plants supply regulated export markets. The credit issues follow from those: price controls on its biggest brands at home, one failed plant inspection shutting off an export market, customer concentration among a few large distributors, and working capital that swells whenever the company pushes stock to hit a number.

Picture a shopkeeper whose sales rise 11% while his credit book grows 52%. He is either extending more generous terms to win business, or recording sales his customers have not really bought. Receivables rose from Rs 468 crore to Rs 712 crore; at the old 95 days, growth alone would explain only Rs 52 crore of the rise, so Rs 192 crore is customers paying later. That is the classic sign of channel stuffingPushing extra stock onto distributors or stockists near a reporting date, often on longer credit, so that sales and profit look higher than end demand., of a large customer in difficulty, or of looser terms to defend share. Any of the three makes EBITDA worth less as cash.

Check it against cash. EBITDA of Rs 420 crore, less about Rs 70 crore of tax, less the Rs 244 crore absorbed by receivables, leaves about Rs 106 crore of operating cash before any capex. A company reporting Rs 420 crore of EBITDA that turns only about a quarter of it into operating cash is telling you its earnings quality needs checking.

Do the reported sum first, because the interviewer expects it. A 3.0x ceiling on Rs 420 crore allows Rs 1,260 crore of debt; less Rs 700 crore outstanding leaves Rs 560 crore. Now adjust: if half of the Rs 192 crore of stretched sales is profit that may never turn into cash, EBITDA is nearer Rs 324 crore, capacity Rs 972 crore and headroom Rs 272 crore. Leverage moves from 1.67x to 2.16x before a rupee of new debt.

Each question should test one reading of the receivables line. Which customers account for the increase in receivables, and how much is overdue beyond agreed terms? Did credit terms change this year, and why? How much of the fourth quarter's sales went to stockists and distributors in the last month? What are stock levels in the channel in weeks of sales? Have any export customers asked for longer terms or disputed invoices? Add two on the other drivers: the status of the latest plant inspections, and the share of domestic sales under price control.

Then give the view. Pellora is not stretched on leverage, but its earnings are less proven than they look. Lend about Rs 272 crore now, with a covenant on receivable days and the rest available once collections show the stretch was temporary.