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Fixed charge coverage definition

Description

Fixed charge coverage shows the financing safety level available to creditors. This ratio indicates company's ability to cover its fixed expenses (interest and leases). Data to calculate this ratio is collected from cash flow statement.

To put if shortly, fixed charge coverage helps to understand, how many times the company can cover its’ financial fixed charges. Fixed charges are defined as committed periodic payments to cover leases and debt.

Norms and limitations

There are no general norms for this ratio.

It is recommended to compare this ratio with the ratios of companies working within the same industry.

Formula

Earnings before fixed charges and taxes equals EBIT (Earnings before interest and taxes) plus leases expenses.

Fixed charges are calculated adding leases expenses to interest payment.