Fixed Charge Coverage Ratio Definition & Meaning | Financial Term | CSIMarket
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Glossary

Fixed Charge Coverage Ratio

Financial Term

Fixed Charge Coverage Ratio (FCCR) is a financial ratio used to determine a company*s ability to meet its fixed financial obligations, such as debt payments and lease payments. It measures the company*s ability to cover these fixed costs with its operating income.

The FCCR is calculated by dividing the company*s earnings before interest, taxes, depreciation, and amortization (EBITDA) by its total fixed charges. Fixed charges include interest payments and lease payments.

The formula for calculating the FCCR is as follows:

FCCR = EBITDA / (Interest payments + Lease payments)

A ratio of 1 or higher indicates that the company*s operating income is sufficient to cover its fixed charges, while a ratio of less than 1 suggests that the company may have difficulty meeting its financial obligations.

The FCCR is commonly used by lenders and investors to evaluate the creditworthiness of a company. A high FCCR indicates that the company is less risky and has a greater ability to pay back its debts. Therefore, a high FCCR may make it easier for a company to obtain financing at a lower cost.

In addition, the FCCR can also be used as a benchmark for a company*s financial performance over time. By comparing the FCCR of one period to another, analysts can assess whether a company*s financial health is improving or deteriorating.

Overall, the Fixed Charge Coverage Ratio is a critical financial measure used in the analysis of a company*s creditworthiness and financial stability.


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