A fund holds an electricals company whose receivable days rose from 65 to 140 in two years, whose operating cash flow is 0.2 times EBITDA, and which sells 18% to related parties. Build the case to exit fully, and say what evidence would change your mind.

Exit fully: the profit is not turning into cash, and the uncollected money sits mostly with the promoter's own companies. Receivables of about Rs 1,010 crore are Rs 541 crore above what 65 days would need, and if outside customers pay in 80 days, related parties are taking about 413 days. Two things would change the view: related-party dues collected in cash, and receivable days back under 90 with cash conversion above 0.7 for two quarters.

Because profit is an opinion about the year and cash is a fact. A tailor who records every stitched suit as income but lets half his customers take the suits home on credit can show a fine profit and still be unable to pay his rent. When receivable days double while profit grows, the company is booking sales faster than it collects them, and the gap is the earliest warning an analyst gets. It shows up in the cash flow statement long before it shows up in the income statement, which is why a fund that reads only earnings finds out last.

Size it first. On the latest quarter's annualised sales, 140 days of receivables is about Rs 1,010 crore. At the old 65 days it would be Rs 469 crore. About Rs 541 crore of reported revenue has not been collected beyond the old norm, almost a full year of EBITDA, which was Rs 551 crore over the last four quarters. Over those four quarters, operating cash flow was only about Rs 108 crore.

Now ask who owes it. Receivable days are a sales-weighted average, so split them. If the 82% of sales to outside customers pays in about 80 days, a normal figure for the industry, those customers account for 65.6 of the 140 days. The remaining 74.4 days come from the 18% of sales to related parties, which means they are paying in about 413 days, and hold about 53% of everything owed. Sales to the promoter's own companies that are not paid for over a year look less like trade and more like the company financing its owners.

Take it seriously, because an interviewer will. Electricals companies sell to state power utilities, which are notoriously slow payers, and a shift towards utility orders could stretch receivables honestly. Large project orders also carry retention money released only on completion. So ask the company for receivables by customer type and age. If the slow money is with utilities, the problem is credit risk on government customers, a real cost but not a governance failure. If it is with the promoter's companies, it is the second story. The annual report's related-party note and the auditor's comments on receivables will usually settle which one it is.

Set the test before selling, so the decision is falsifiable. Keep the stock only if related-party dues are collected in cash, shown in the bank balance and not netted against payables or replaced by new loans to the same parties, and if receivable days fall below 90 with trailing cash conversion above 0.7 for two consecutive quarters. An independent review of related-party terms by the audit committee would help but is not enough by itself. Absent that evidence, a long-only fund's version of a short is a full exit, sold at a pace the stock's volume allows. The limit: the related-party split rests on an assumed 80 days for outside customers. If the true figure is 110, related parties are at about 280 days, still far too slow, so the conclusion holds across a wide range of assumptions.