Abstract
The aim of the research is to evaluate the differences between economic and financial results in a sample of micro enterprises (MEs) and small / medium sized enterprises (SMEs) in fruit and vegetables processing industry in Italy. The firms included in the sample operate in an industry characterized by high capital intensity; this character is caused by the length of working capital cycle and high level of fixed asset investment. These characteristics of the firms can amplify the differences in economic and financial management results. In order to offer a comparison in applying economic and financial approaches, especially useful for agro-food firms operating in a capital intensive sector, in the article are calculated 12 ratios, of which 7 are sustainability ratios (calculated 3 with economic approach and 4 with financial approach) and 5 are interest coverage ratios (calculated 2 with economic approach and 3 with financial approach). The article highlights that economic and financial approach has statistically different result in the firm’s sample. Considering the significant differences in economic approach and financial approach, the firms could incur in error, and it will be necessary to identify which of the 2 approaches provides the correct indication of sustainability. The way of analysis proposed in the article can then be used to analyze firms operating in other agro-food sectors, especially if characterized by high capital intensity, high capital investment in fixed assets, long production cycle and long time debt collection. Key words: Firm cycle sustainability, economic and financial approach, interest coverage ratio, fruit and vegetables processing industry.
Highlights
The evaluation of an investment has the aim to quantify the return on equity capital (Lagerkvist and Andersson, 1996)
The analysis shows that margins calculated with economic approach, that are EBITDA, earnings before interest and taxes (EBIT) and PROFIT, often differ significantly from the margins calculated with financial approach (CF, operating cash flow (OCF), unlevered free cash flow (UFCF) and free cash flow to equity (FCFE))
The analysis in the article, applied to a sample of firms operating in the fruit and vegetables processing industry in Italy, shows that firms in the sample are characterized by high capital absorption in working capital and fixed assets cycle
Summary
The evaluation of an investment has the aim to quantify the return on equity capital (Lagerkvist and Andersson, 1996). The usefulness to compare economic and financial approach is a central topic especially in the management of micro enterprises (MEs) and small and medium sized enterprises (SMEs); in these companies, an error in the assessment of business cycle sustainability can cause default because these firms normally have an access to bank loans and equity market worst than large companies For this purpose, the article analyzes the economic and financial results in a sample of MEs and SMEs operating in the processing industry of fruit and vegetables in Italy. The article is organized as follows: First it exposed the methodology applied to analyze the principles considered for economic and financial approaches, with a review of the literature having the aim to express the role of economic and financial analysis to evaluate the firm’s cycle sustainability It is presented the sample of firms and its characteristics in terms of economic and financial data; we verify if there was a significant difference between economic and financial results in the firm data. Calculation of interest coverage ratios (ICRs) according to economic and financial approach; these ratios compare income and financial margins with the cost of debt in the sample for each firm and the results are compared between MEs and SMEs
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