A comparative analysis nin the sector of milk and dairy products: ICRs with EBITDA / EBIT and cash flow approach

The interest coverage ratios (ICRs) are used to quantify the ability of firms to pay financial debts; ICRs are then considered by banks such as covenants in the financing term sheet, and are used by researchers and rating agencies to estimate the probability of default. Typically, ICRs calculation is based on profit margins, such as EBITDA and EBIT; EBITDA and EBIT approximate, but do not directly express, cash flows available to pay financial debts. The article aims then to evaluate whether there are significant differences in results using ICRs based on EBITDA or EBIT and ICRs based on cash flow (OCF). The application is made to a sample of firms characterized by high absorption of capital, as firms of milk and dairy products, in Italy. The paper would examine a sample of about 200 firms to quantify the difference in applying an economic approach and a financial approach to ICRs ratios; the paper has the aims to evaluate whether these differences are significant and therefore the ICRs with financial approach are more significant than the ICRs with economic approach in the evaluation of sustainability of the firm’s cycle.