Over five years Mardanta Infra reported cumulative profit of Rs 2,000 crore but operating cash flow of only Rs 600 crore, with unbilled revenue rising every year. What is happening, and what would you ask management?

Mardanta is booking profit it has not billed: only 30% of five years' profit arrived as cash, and Rs 1,100 crore of the gap sits in unbilled revenue. Unbilled revenue rose from about 70 to 117 days of revenue, so the problem is growing faster than the business. Either billing milestones are slipping, claims are being booked before clients accept them, or cost estimates are too optimistic. Until the ageing is explained, treat the earnings as unproven.

A tuition teacher who writes every month's fees into her register as earned, though half the parents have not paid, will show a healthy profit and an empty purse. One slow month is normal; five years of it means some of those fees are never coming. Timing differences between profit and cash reverse within a year or two, so a gap that widens for five years running is not timing: it is the loudest warning an income statement can give. Mardanta turned Rs 2,000 crore of profit into Rs 600 crore of operating cash and borrowed to pay its dividends.

Rebuild operating cash flow from profit: add back depreciation, then subtract every rupee that went into working capital. Of the Rs 1,400 crore shortfall, Rs 1,100 crore is the rise in unbilled revenueRevenue recognised for work done under a contract that has not yet been invoiced to the client; shown as a contract asset on the balance sheet., Rs 450 crore is receivables and Rs 150 crore other working capital. Receivables are at least invoices the client has seen. Unbilled revenue is Mardanta's own estimate of what it has earned, which is why it deserves the harder look.

Ask questions whose answers are numbers, not reassurance. First, the ageing of unbilled revenue: how much is more than a year old, and on which contracts. Second, which billing milestones have slipped and why. Third, how much of the unbilled balance is claims for extra work or cost overruns that the client has not yet accepted, and how many are in arbitration. Fourth, how often estimates of total contract cost have been revised upwards, because a rising cost estimate on a fixed-price contract should cut profit already booked. Fifth, whether any receivables have been sold or discounted, which would flatter reported cash.

Then put a number on the downside. If 30% of the Rs 1,600 crore of unbilled revenue is never billed, the write-off is Rs 480 crore before tax, nearly a quarter of five years' reported profit. For valuation, lean on cash: five years of operating cash flow average Rs 120 crore a year against reported profit of Rs 400 crore, and any earnings multiple should be applied only to profit the business has shown it can collect.