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// DIAGNOSTICS / THREE DIAGNOSTICS
FROM HOW BANKERS THINK · CHAPTER 3
// CALCULATOR · NO SIGNUP

The Three Diagnostics

A working capital request is a claim about the future. The Three Diagnostics test the claim against the past — by looking at the three places where the truth tends to live.

// THE THREE DIAGNOSTICS, IN ONE PARAGRAPH

The Three Diagnostics, from Michael Shang's How Bankers Think, are three tests run in sequence on any working capital request, to separate a borrower who needs more capital because they are growing from one who needs it because they are deteriorating. Each test points scepticism at one of the three places the truth tends to live: the sales claim, the cash flow statement, and the shape of the facility being asked for. They cut both ways — when all three say growth, the discipline is to believe them and approve quickly, which is why the files published on this site include an approval alongside the declines.

  1. 01Is the growth real? — Volume or price · receivables moving in line with sales · the industry confirming the story.
  2. 02Is the cash conversion intact? — Operating cash flow against net income over years · the cash conversion cycle · the underrated trend in payables days.
  3. 03Does the structure match the need? — Revolving against term · a facility that self-corrects with the trade cycle · what the borrower asked for, and why.

How this calculator maps onto them: it computes diagnostic 1 and diagnostic 2 from twelve inputs, and splits diagnostic 2 into its two readings — earnings-to-cash conversion, then the payables trend, the leg that most often moves last. Diagnostic 3 is a structural judgment the written read covers and the tool does not compute; there is no third diagnostic in the numbers. Canonical statement: the frameworks page.

The Three Diagnostics, as the book states them, are three questions run in sequence on a working capital request: is the growth real, is the cash conversion intact, and does the structure match the need. This calculator runs the numeric legs of the first two: whether the revenue growth shows up in the receivables (or was bought with extended terms), whether reported earnings convert to cash (or stay trapped on the balance sheet), and — read on its own card, because it is the leg that most often moves last — whether the borrower is stretching suppliers to fund the gap. Both of the last two belong to diagnostic 2.

Enter the numbers below. The tool will return what a senior banker would see. The default values are pre-populated with Pacific Premium Foods data — the borrower from Drill 01. Replace with your own borrower's numbers.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// INPUTS

// THIS YEAR
// PRIOR YEAR

Diagnostic reading updated: Pacific Premium pattern · mature crisis (D2 EXTREME)

// DIAGNOSTIC READING

// DIAGNOSTIC READING

Pacific Premium pattern · mature crisis (D2 EXTREME)

MATURE_CRISIS

EBITDA positive, operating cash negative — earnings are not cash.

DIAGNOSTIC 1 — IS THE GROWTH REAL?
STRONG SIGNAL
Revenue growth50.0%
DSO movement+34 days (48 → 82)
DSO growth vs revenue growth+71% vs +50%
Inventory days growth vs revenue growth+68% vs +50%
READING

Revenue grew, but DSO grew faster still. Customers are paying materially slower relative to the revenue ramp — the growth is partly financed from the receivable line, not just from volume. That read stands even before you layer the cash conversion collapse underneath it.

DIAGNOSTIC 2, CONVERSION LEG — DOES EBITDA CONVERT TO CASH?
STRONG SIGNAL — EXTREME
OCF / EBITDA conversion (TY)-16%
OCF / EBITDA conversion (PY)+45%
Conversion delta (YoY)-61 ppts
READING

EBITDA still positive, operating cash flow flipped negative. The earnings exist on the income statement but are not converting to cash; conversion has crossed from weak into extreme territory year on year. In a committee pack, this is often the line that forces the conversation from “support with conditions” to “decline as framed unless the bridge is explained and cured.”

DIAGNOSTIC 2, PAYABLES LEG — IS THE BORROWER STRETCHING SUPPLIERS?
CLEAR
DPO change (days)+3 days (35 → 38)
READING

Supplier-side stretch may or may not yet show as a STRONG SIGNAL on DPO alone — the Pacific Premium case often looks “last to break.” Do not confuse a quiet payables leg with a clean trade cycle when Diagnostics 1 and 2 are screaming. The absence of a supplier blowout yet is relief, not absolution.

// HOW THE TESTS ARE SCORED

These are the tool's own bands, printed from the same file that computes them. They are a practitioner's reading rules for a first pass — not industry thresholds, not covenant levels.

  • Diagnostic 1. Applied when revenue grew at least 5%. Debtor days and inventory days may each outgrow revenue by up to 5 points and read CLEAR; up to 15 points is FLAGGED; beyond that, STRONG SIGNAL. On flat or falling revenue the lines are read against zero instead.
  • Diagnostic 2, conversion leg. Operating cash flow over EBITDA: at or above 0.7 CLEAR; at or above 0.5 FLAGGED; at or above 0.25 STRONG SIGNAL; below that, EXTREME. EBITDA at or below zero is not scored as a ratio.
  • Diagnostic 2, payables leg. Payables days, year on year: up to 5 days longer CLEAR; up to 15 FLAGGED; beyond that, STRONG SIGNAL.

// SO WHAT DOES THIS TELL YOU?

All three diagnostics confirming a mature crisis read does not require three red badges on every input — it requires the combined picture a senior banker holds in their head: receivables funding growth, earnings not converting to cash, and a facility increase that risks funding the deterioration. The default posture is deep diligence on the cash bridge and a hard look at whether incremental debt cures the cycle or extends it.

THE WORKED EXAMPLE OF THIS PATTERN
01Pacific Premium FoodsThe same borrower, read at the point where the working capital cycle has stopped closing at all.READ THE FILE AND MAKE YOUR CALL →

The Three Diagnostics framework is from Chapter 3 of How Bankers Think — Inside Commercial Banking's Hidden Curriculum.