Application of ICR with a net financial position (NFP) repayment approach in the Parma PDO ham sector

The interest coverage ratios (ICRs) are frequently applied to evaluate the firms’ capacity to pay cost of debt and are even used as covenants in financing transactions. However, the traditional analysis of the ICRs only highlights the ability of firms to pay the cost of debt, not considering net financial position (NFP) repayment. ICRs analysis is then sufficient if the level of debt is considered optimal, and if there is no repayment schedule of the outstanding loans. In other cases, firms could properly apply a modified ICRs approach that quantifies the ability to repay NFP. In the article ICRs with net financial position (NFP) repayment approach are applied, testing several ratios, that we call NFP_CRs ratios, on a sample data of processing firms of Parma PDO ham. These firms are often characterized by high capital intensity and high indebtedness. Parma PDO ham is a high quality food production, obtained by transforming fresh pork leg in a part of the territory of the province of Parma, in Italy; process requires an aging period of at least 12 months, according to the product specification, thus increasing investment in fixed asset and working capital. The research analysis shows that NFP_CRs are useful to quantify NFP even if various NFP_CRs are not always correlated. This result shows that NFP repayment could correctly be carried out only applying UFCF based NFP_CRs. The research can be further developed by analyzing, even in other sectors, firms characterized by lower capital intensity and shorter financial cycle, even in countries with weak financial market.