Interest coverage ratios: accrual and cash based approaches in the dairy sector in Italy

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 the rating agencies to estimate the probability of default of firms. Typically, ICRs calculation is based on profit margins, such as EBITDA and EBIT, considering an accrual based approach. The paper aims to evaluate whether there are significant differences applying ICRs accrual based and ICRs based on different definitions of cash flow (CF). The application is made to a sample of firms characterizd by high absorption of capital operating in the Italian agro-food sector as the dairy firm.