Fixed Charge Coverage Ratio Analysis

Definition: Fixed Charge Coverage Ratio is used to measure how well the firm covers their fixed costs such as interest expense and leases.

Formula:
Fixed Charge Coverage Ratio = (Earnings Before Interest and Taxes (EBIT)+ fixed charge) / (total interest + fixed charge)
Or,
Fixed Charge Coverage Ratio = (EBIT + Lease Expenses) / (Lease Expenses + Interest expense)

Example 1:
SK Ltd has $32,000 in EBIT, $2,000 in interest payments and $3,000 in lease payments.
Then,
Fixed charge coverage ratio = (32,000 + 3,000) / (3,000 + 2,000) = 7
This means that the company has earned seven times its fixed charges.

Example 2:
Pool Ltd earned $600,000 before interest and taxes for the fiscal year ending December 2010, and had an interest expense of $80,000 and lease expenses amounted to $20,000.
Then,
Fixed charge coverage ratio = (600,000 + 20,000) / (20,000 + 80,000) = 6.2

* Next: EBIT Formula & Example
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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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