Fixed Charge Coverage Ratio Analysis
Fixed Charge Coverage Ratio Analysis

See Also:
Fixed Charge Coverage Ratio Definition
Operating Income (EBIT)
Debt Service Coverage Ratio
Fixed Costs
Times Interest Earned Ratio
Free Cash Flow
Financial Ratios

Fixed Charge Coverage Ratio Analysis Formula

See the fixed charge coverage ratio analysis formula below:

Times Interest Earned Ratio = (EBIT + fixed charge) ÷ (total interest + fixed charge)

Fixed Charge Coverage Ratio Calculations

Fixed charge coverage ratio calculations can be simple or difficult depending on the complexity of the associated financial information. For example, a company has $ 16,000 in EBIT, $ 1,000 in interest payments and $2,000 in lease payments.

Fixed charge coverage ratio = (16,000 + 2,000) / (1,000 +2,000) = 8

This means that a company has earned eight times its fixed charges.

[button link=”/scfo-lab-sl” bg_color=”#eb6500″]Learn About The SCFO Lab[/button]

Fixed Charge Coverage Ratio Example

For example, Ron owns a small business which provides artisan-quality roofing services to upscale homes. Ron has carved a unique niche for his company over time. He is proud of his achievements and satisfied customer base.
Recently, the recession has caused Ron to see less jobs for Spanish tile roofing. With this serving as the bread-and-butter of Ron’s company, he wants to be prepared for additional dips in his revenues due to less sales.
Ron, essentially, wants to perform fixed charge coverage ratio analysis to assure that his company can survive the recession.
Ron speaks to his controller and performs the following equation. Ron’s company has $ 16,000 in EBIT, $ 1,000 in interest payments and $2,000 in lease payment. So…

Fixed charge coverage ratio = (16,000 + 2,000) / (1,000 +2,000) = 8

After speaking with his controller, Ron is confident that his company can survive an extended recession. He needs to check he has not violated his fixed charge coverage ratio covenant (bank requirement) for his bank loan.
Ron’s company controller looks at the agreement. Ron, after a little work, realizes that his company has not violated a covenant. Despite the fact that Ron’s company has an acceptable fixed charge coverage ratio, EBITDA will remain the same for his covenants with the bank to stay unbroken. Ron respects the value of keeping up-to-date with financial statements, as well as bank agreements, thanks to the hand of his company accountant.
fixed charge coverage ratio analysis


For statistical information about industry financial ratios, please click the following website: www.bizstats.comand


The Accounting Gap Between Large and Small Companies

The Accounting Gap: It’s unfortunate, but true. A large gap exists between the accounting departments of large or publicly traded companies and smaller or private companies. In our past 25 years of consulting we’ve noticed that more often than not, these smaller/private companies will fill the gap with Bookkeepers, rather than the degreed Accountants/CPAs they

Read More »

The Struggles of Private Company Accounting

Building your Accounting Department… When I meet a business owner operating at a successful $10+ mil in revenue I often hear them say “My CPA…” and I immediately know they are referring to a tax CPA. One thing ALL entrepreneurs have in common is that they have to file a tax return. So from day

Read More »

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »


Financial Leadership Workshop

MARCH 28TH-31ST 2022


Financial Leadership Workshop


June 12-15th, 2023

WIKI CFO® - Browse hundreds of articles