Fixed-Charge Coverage Ratio (FCCR)

What it is

The Fixed-Charge Coverage Ratio (FCCR) measures a company’s ability to cover fixed financial obligations—such as interest, lease payments, insurance, and other fixed charges—from operating earnings. Lenders and creditors use it to assess how comfortably a business can meet recurring fixed payments.

Formula and terms

FCCR = (EBIT + FCBT) / (FCBT + i)

where:
* EBIT = Earnings Before Interest and Taxes
* FCBT = Fixed Charges Before Tax (lease payments and other fixed operating charges)
* i = Interest expense

This formula effectively adds fixed charges (commonly lease costs) back to EBIT and compares that adjusted earning power to total fixed obligations (fixed charges plus interest).

How to calculate (step-by-step)

1. Determine EBIT from the income statement.
2. Identify fixed charges before tax (FCBT) — e.g., lease payments, certain insurance, preferred dividends (as applicable).
3. Identify interest expense (i).
4. Compute FCCR = (EBIT + FCBT) ÷ (FCBT + i).
5. Interpret the quotient: an FCCR of 1.5 means earnings cover fixed charges and interest 1.5 times.

Worked example

Company A:
* EBIT = $300,000
Lease payments (FCBT) = $200,000
Interest expense (i) = $50,000

FCCR = (300,000 + 200,000) / (200,000 + 50,000) = 500,000 / 250,000 = 2.0

Interpretation: Company A’s earnings cover fixed charges twice. A higher FCCR indicates more cushion to absorb fixed obligations.

How to interpret the ratio

• FCCR > 1: earnings are sufficient to cover fixed charges and interest.
• The higher the ratio, the stronger the company’s ability to meet fixed obligations and the more attractive it typically is to lenders.
• A low FCCR signals potential difficulty in servicing fixed payments and increases credit risk.

Comparison with related metrics

• Times Interest Earned (TIE) focuses only on interest coverage (EBIT ÷ interest). FCCR is more conservative because it includes other fixed charges, such as lease payments.
• Lenders usually consider FCCR alongside TIE, liquidity ratios, cash flow metrics, and balance-sheet measures for a fuller credit assessment.

Limitations

• FCCR does not capture rapid changes in capital structure, seasonal cash flow swings, or one-time charges.
• It ignores owners’ draws and dividend distributions that reduce available earnings.
• Different definitions of fixed charges (what counts as FCBT) can make comparisons across firms inconsistent.
• Because of these limits, FCCR should be used with other financial metrics and qualitative judgments.

Practical use

• Commonly used by banks and creditors when evaluating loan requests.
• Useful for comparing companies in capital-intensive sectors with significant lease or fixed obligations.

Bottom line

FCCR is a useful, conservative indicator of a company’s ability to meet recurring fixed obligations. A higher FCCR implies greater financial stability and creditworthiness, but it should not be the sole basis for lending or investment decisions—complementary ratios and contextual analysis are necessary.