What is Fixed-charge coverage ratio?
In short
The fixed-charge coverage ratio measures a company's ability to cover fixed financing obligations: earnings before interest and taxes plus fixed charges (such as lease payments), divided by fixed charges plus interest.
Key takeaways
- It is broader than times interest earned because it includes lease and similar payments.
- Lenders often set a minimum level in loan covenants.
- A ratio below 1 means earnings don't cover fixed obligations.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company with a current ratio of 0.8 uses cash to pay off an accounts payable balance. What is the effect on the current ratio?