Combining fish with improvised stone - or kitchen knife, to prepare the fish, only works if the fish is inside of inventory. If prepared, only a small pile of guts appear. If you try to combine a fish and one of the knifes laying on the ground it only allows you to swap the knife and the fish. When knife is also on the ground and you try to combine it with the fish, the items "become red", you cant combine or swap them.

Fish catched by improvised Fishing Rod with improvised fishing hook.
kitchen knife = worn
improvised stone knife = pristine