Learn all about the fixed charge coverage ratio -- what it is, how it is calculated, and why it is important. Discover how this financial metric can help businesses assess their ability to meet fixed debt obligations, making informed financial decisions leading to long-term success.
The fixed charge coverage ratio is a financial metric used by lenders and analysts to determine a company's ability to cover its fixed expenses, such as interest payments and lease commitments. It measures the cash flow available to meet these obligations after deducting other expenses.
To calculate the fixed charge coverage ratio, you typically divide the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) by its fixed charges. Fixed charges include interest expenses, lease payments, and other fixed obligations.
The fixed charge coverage ratio provides an indication of a company's ability to meet its debt obligations. Lenders and investors often look at this ratio before deciding whether to provide funding or invest in a business. It helps assess the level of risk associated with a company's financial structure.
A fixed charge coverage ratio of less than 1 indicates that the company does not generate enough cash flow to cover its fixed expenses. This suggests a higher risk of defaulting on debt payments. Conversely, a ratio above 1 reflects a healthier financial position, showing that the company has sufficient income to meet its fixed charges.
Benchmarking the fixed charge coverage ratio can be done by comparing it with industry peers or established standards. This allows for a more comprehensive analysis of a company's financial health and performance in relation to others in the same sector.
It's important to note that the fixed charge coverage ratio solely focuses on a company's ability to cover fixed expenses. It does not consider fluctuating or variable costs, nor does it reflect a company's liquidity position or balance sheet strength.
In summary, the fixed charge coverage ratio helps evaluate a company's ability to handle its fixed commitments. It is a useful financial metric for creditors, investors, and analysts to assess the risk associated with debt repayment.
Previous term: Interest Coverage Ratio
Next term: Debt Coverage Ratio
Did you know you can earn $30 back on your first $30 of qualifying purchases with Rakuten?
Join now and start saving on every purchase from top retailers like Target, eBay, Zappos, Walmart, Kohl's & CVS. Whether you're shopping for fashion, electronics, home essentials, or health products, Rakuten makes it rewarding.
Sign up through this link and explore the endless possibilities to save and earn cash back!
Check out the Symbol Surfing blog to learn about investing.
