Fixed Charge Coverage Ratio

Fixed Charge Coverage Ratio  sheds light on a company’s ability to satisfy fixed financing expenses such as interest and leases.

Fixed Charge Coverage Ratio

Fixed Charge Coverage Ratio  sheds light on a company’s ability to satisfy fixed financing expenses such as interest and leases.

 

Fixed Charge Coverage Ratio Formula

Fixed Charge Coverage Ratio is calculated by summing up Earnings before interest and Taxes (EBIT) and fixed charges which is divided by fixed charges before tax and interest. EBIT, taxes and the interest expenses are to be taken from the income statement of the company. The lease payments are taken from the balance sheet, usually appearing as a footnote of the balance sheet.



Interpretation of Fixed Charge Coverage Ratio

The Fixed Charge Coverage Ratio is the number of times the company is able to meet its fixed charges per year. Therefore this means that by calculating the fixed charge coverage ratio, it helps in ascertaining the company’s ability to pay various fixed costs .



The Fixed Charge Coverage Ratio provides investors a better understanding of the company's loss-taking capacity in the event of unforeseen misfortune.


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