The fixed charge coverage ratio is a financial metric that assesses a company’s ability to cover its fixed costs, such as interest expense and lease payments, using its earnings.
Primary Implication
A high Fixed Charge Coverage ratio indicates a healthier and less risky business to invest in or loan money.
A low ratio confirms that the company can barely meet its monthly bills and is not a good investment or financing risk.
Overview
The Fixed Charge Coverage Ratio is a Coverage Ratio that measures a company’s ability to pay all of its fixed charges or expenses with its existing income, before interest and income taxes, by comparing the company’s income with its fixed costs. This ratio is an expanded version of the Times Interest Earned Ratio.
The formula for calculating the Fixed Charge Coverage Ratio is as follows:
EBIT + Fixed Charges Before Taxes / Fixed Charges Before Taxes + Interest Expense
A ratio of 6 means that a company’s income is six times greater than interest and lease payments. This is a healthy ratio that most lenders are looking for and will view positively as an investment.
Higher is Better: indicates a healthier and less risky business to invest in or loan money.
Lower is Worse: confirms that the company can barely meet its monthly bills and is not a good investment.