Definition – What is the fixed charge coverage ratio?
The fixed charge coverage ratio looks at a firm’s ability to cover their fixed costs.
Formula – How to calculate the fixed charge coverage ratio
Fixed Charge Coverage Ratio = (EBIT + Lease Payments) / (Lease Payments + Interest)
A company has an EBIT of $3,000, lease payments of $750, and an interest expense of $3,000.
Fixed Charge Coverage Ratio = ($3,000 + $750) / ($750 + $3,000) = $3,750 / $3,750 = 1
Therefore, this company has a fixed charge coverage ratio of 1.000.
Sources and more resources
- NASDAQ – Fixed-charge coverage ratio – A very quick definition of the fixed-charge coverage ratio.
- Accounting Tools – Fixed charge coverage ratio – An explanation of the formula as well as a sample calculation.
- The Balance SMB – How to Calculate and Use the Fixed Charge Coverage Ratio – A quick walk-through of how to calculate the fixed charge coverage ratio.
- Investopedia – Fixed-Charge Coverage Ratio – Explaining and breaking down the fixed charge coverage ratio.