Accounting Corner

Explore Accounting & Finance

  • Home
  • FREE Downloads
  • Basic
  • Intermediate
  • Advanced
  • Practical Accounting Tips
  • Career Tips

Fixed Charge Coverage Ratio





The Fixed Charge Coverage Ratio, also known as the Debt Service Coverage Ratio (DSCR), is a financial indicator designed to measure a company’s ability to satisfy its fixed financial obligations. These obligations primarily encompass interest payments on debt, lease agreements, and other fixed charges.

Why Fixed Charge Coverage Ratio Matters

The Fixed Charge Coverage Ratio serves several crucial purposes:

  1. Assessing Creditworthiness: Lenders and creditors use this ratio to evaluate the creditworthiness of borrowers before extending loans or credit facilities. It helps them gauge the risk associated with providing financial assistance.
  2. Investor Insights: Investors leverage this metric to assess a company’s financial stability and the potential risks tied to its debt obligations. It aids in making informed investment decisions.

Calculating the Fixed Charge Coverage Ratio

The Fixed Charge Coverage Ratio is computed using the following formula:

Fixed Charge Coverage Ratio = (EBIT + Fixed Charges) / (Fixed Charges + Interest Expense)

  • EBIT (Earnings Before Interest and Taxes) represents a company’s operational income.
  • Fixed Charges encompass lease payments and other fixed financial obligations.
  • Interest Expense denotes the total interest paid on outstanding debt.

Real-Life Example

For instance, imagine a company with an EBIT of $500,000, fixed charges totaling $100,000, and interest expenses amounting to $50,000. Calculating the Fixed Charge Coverage Ratio results in a ratio of 6.0. This signifies that the company generates six times the income necessary to meet its fixed financial commitments.

Interpreting the Ratio

  • A Fixed Charge Coverage Ratio exceeding 1.0 indicates that a company generates enough income to cover its fixed obligations comfortably.
  • Conversely, a ratio below 1.0 suggests that the company may encounter difficulties in meeting these obligations.

Considerations and Monitoring

  • The ratio should be analyzed within the context of industry benchmarks and tracked over time to identify trends.
  • It’s important to note that different industries may have varying acceptable levels of Fixed Charge Coverage Ratios. Therefore, comparisons should be made while considering industry standards.
  • Changes in fixed charges, interest rates, or EBIT can impact the ratio significantly, necessitating close monitoring.

In summary, the Fixed Charge Coverage Ratio is a critical financial metric that assesses a company’s ability to meet its fixed financial obligations with its operational income. It plays a pivotal role in the evaluation of a company’s financial stability and the risks associated with its debt and fixed charges, making it a valuable tool for creditors, investors, and financial analysts.

 


The Most Popular Accounting & Finance Topics:

  • Balance Sheet
  • Balance Sheet Example
  • Classified Balance Sheet
  • Balance Sheet Template
  • Income Statement
  • Income Statement Example
  • Multi Step Income Statement
  • Income Statement Format
  • Common Size Income Statement
  • Income Statement Template
  • Cash Flow Statement
  • Cash Flow Statement Example
  • Cash Flow Statement Template
  • Discounted Cash Flow
  • Free Cash Flow
  • Accounting Equation
  • Accounting Cycle
  • Accounting Principles
  • Retained Earnings Statement
  • Retained Earnings
  • Retained Earnings Formula
  • Financial Analysis
  • Current Ratio Formula
  • Acid Test Ratio Formula
  • Cash Ratio Formula
  • Debt to Income Ratio
  • Debt to Equity Ratio
  • Debt Ratio
  • Asset Turnover Ratio
  • Inventory Turnover Ratio
  • Mortgage Calculator
  • Mortgage Rates
  • Reverse Mortgage
  • Mortgage Amortization Calculator
  • Gross Revenue
  • Semi Monthly Meaning
  • Financial Statements
  • Petty Cash
  • General Ledger
  • Allocation Definition
  • Accounts Receivable
  • Impairment
  • Going Concern
  • Trial Balance
  • Accounts Payable
  • Pro Forma Meaning
  • FIFO
  • LIFO
  • Cost of Goods Sold
  • How to void a check?
  • Voided Check
  • Depreciation
  • Face Value
  • Contribution Margin Ratio
  • YTD Meaning
  • Accrual Accounting
  • What is Gross Income?
  • Net Income
  • What is accounting?
  • Quick Ratio
  • What is an invoice?
  • Prudent Definition
  • Prudence Definition
  • Double Entry Accounting
  • Gross Profit
  • Gross Profit Formula
  • What is an asset?
  • Gross Margin Formula
  • Gross Margin
  • Disbursement
  • Reconciliation Definition
  • Deferred Revenue
  • Leverage Ratio
  • Collateral Definition
  • Work in Progress
  • EBIT Meaning
  • FOB Meaning
  • Return on Assets – ROA Formula
  • Marginal Cost Formula
  • Marginal Revenue Formula
  • Proceeds
  • In Transit Meaning
  • Inherent Definition
  • FOB Shipping Point
  • WACC Formula
  • What is a Guarantor?
  • Tangible Meaning
  • Profit and Loss Statement Template
  • Revenue Vs Profit
  • FTE Meaning
  • Cash Book
  • Accrued Income
  • Bearer Bonds
  • Credit Note Meaning
  • EBITA meaning
  • Fictitious Assets
  • Preference Shares
  • Wear and Tear Meaning
  • Cancelled Cheque
  • Cost Sheet Format
  • Provision Definition
  • EBITDA Meaning
  • Covenant Definition
  • FICA Meaning
  • Ledger Definition
  • Allowance for Doubtful Accounts
  • T Account / T Accounts
  • Contra Account
  • NOPAT Formula
  • Monetary Value
  • Salvage Value
  • Times Interest Earned Ratio
  • Intermediate Accounting
  • Mortgage Rate Chart
  • Opportunity Cost
  • Total Asset Turnover
  • Sunk Cost
  • Housing Interest Rates Chart
  • Additional Paid In Capital
  • Obsolescence
  • What is Revenue?
  • What Does Per Diem Mean?
  • Unearned Revenue
  • Accrued Expenses
  • Earnings Per Share
  • Consignee
  • Accumulated Depreciation
  • Leashold Improvements
  • Operating Margin
  • Notes Payable
  • Current Assets
  • Liabilities
  • Controller Job Description
  • Define Leverage
  • Journal Entry
  • Productivity Definition
  • Capital Expenditures
  • Check Register
  • What is Liquidity?
  • Variable Cost
  • Variable Expenses
  • Cash Receipts
  • Gross Profit Ratio
  • Net Sales
  • Return on Sales
  • Fixed Expenses
  • Straight Line Depreciation
  • Working Capital Ratio
  • Fixed Cost
  • Contingent Liabilities
  • Marketable Securities
  • Remittance Advice
  • Extrapolation Definition
  • Gross Sales
  • Days Sales Oustanding
  • Residual Value
  • Accrued Interest
  • Fixed Charge Coverage Ratio
  • Prime Cost
  • Perpetual Inventory System
  • Vouching

Return from Fixed Charge Coverage Ratio to AccountingCorner.org home

Liked this post? Share it!

FREE Downloads

Thank you!

You have successfully joined our subscriber list.

Join & Follow

Explore Selected Topics

  • Accounting Basic
  • Intermediate Accounting
  • Advanced Accounting
  • Accounting Books
  • Career Tips
  • Practical Accounting Tips

Copyright @2024 / AccountingCorner.org | Privacy Policy

Manage Consent
To provide the best experiences, we use technologies like cookies to store and/or access device information. Consenting to these technologies will allow us to process data such as browsing behavior or unique IDs on this site. Not consenting or withdrawing consent, may adversely affect certain features and functions.
Functional Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
Manage options Manage services Manage {vendor_count} vendors Read more about these purposes
View preferences
{title} {title} {title}
Manage Consent
To provide the best experiences, we use technologies like cookies to store and/or access device information. Consenting to these technologies will allow us to process data such as browsing behavior or unique IDs on this site. Not consenting or withdrawing consent, may adversely affect certain features and functions.
Functional Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
Manage options Manage services Manage {vendor_count} vendors Read more about these purposes
View preferences
{title} {title} {title}