Fixed Charge Coverage Ratio Calculator
Measure a company's ability to cover fixed charges like interest and lease expenses
| Ratio Range | Interpretation | Your Ratio | Status |
|---|---|---|---|
| Below 1.0 | Insufficient coverage - high risk | - | - |
| 1.0 - 1.5 | Marginal coverage - some risk | - | - |
| 1.5 - 2.5 | Adequate coverage - acceptable | - | - |
| Above 2.5 | Strong coverage - comfortable | - | - |
The Fixed Charge Coverage Ratio measures a company's ability to cover fixed charges (interest, leases, insurance) with operating income. It's a stricter test than the interest coverage ratio.
• Increase operating profits
• Reduce fixed obligations
• Renegotiate lease terms
• Improve operational efficiency
• Declining ratio over time
• Rising fixed obligations
• Falling EBIT margins
• Ratio below 1.0
A Fixed Charge Coverage Ratio (FCCR) Calculator helps lenders and investors evaluate a company's ability to cover all fixed financial obligations, including interest payments, lease expenses, and other unavoidable costs. This ratio provides a more comprehensive view of financial health than the standard interest coverage ratio.
How the Fixed Charge Coverage Ratio Calculator Works
Formula
Where:
EBIT = Earnings Before Interest and Taxes
Fixed Charges = Lease payments, insurance premiums, preferred dividends, and other contractual obligations
Interest Expense = Interest on all debt obligations
Example Calculation
| Financial Data | Amount ($M) |
|---|---|
| EBIT | 25 |
| Lease Payments | 5 |
| Insurance Premiums | 2 |
| Interest Expense | 8 |
| FCCR | 2.67 (25 + 5 + 2) ÷ (8 + 5 + 2) |
Interpretation:
> 2.0: Excellent coverage (low risk)
1.2 - 2.0: Adequate coverage (monitor trends)
< 1.2: Potential financial distress
< 1.0: Cannot cover fixed charges from earnings
Key Inputs Required
EBIT (from income statement)
All Fixed Charges:
Lease/rental payments
Insurance premiums
Equipment financing payments
Preferred dividends (if applicable)
Interest Expense
Why FCCR Matters More Than Standard Interest Coverage
✅ Comprehensive Obligations - Includes leases and other fixed costs
✅ Modern Business Reality - Accounts for operating leases (ASC 842/FRS 16)
✅ Stress Testing - Shows ability to withstand multiple fixed expenses
✅ Loan Covenants - Many lenders now use FCCR instead of just ICR
Industry Benchmarks
| Industry | Healthy FCCR | Reasoning |
|---|---|---|
| Retail | 1.8 - 2.5 | High lease obligations |
| Airlines | 1.5 - 2.0 | Heavy equipment financing |
| Technology | 3.0 - 5.0 | Low fixed cost structure |
| Manufacturing | 2.0 - 3.0 | Moderate capital intensity |
How to Improve Your FCCR
✔ Renegotiate Leases - Convert to variable payment structures
✔ Refinance Debt - Lower interest expenses
✔ Increase Operational Efficiency - Boost EBIT margins
✔ Sell & Leaseback Assets - Improve liquidity
Special Considerations
⚠ Capital Leases vs Operating Leases - Both must now be included under current accounting standards
⚠ Preferred Dividends - Only include if cumulative (must be paid)
⚠ Tax Adjustments - Some analysts use EBITDAR (add back rent)
Comparison to Similar Ratios
| Ratio | Includes | Best For |
|---|---|---|
| Interest Coverage | Only interest | Basic debt analysis |
| Debt Service Coverage | Interest + principal | Full debt obligations |
| FCCR | Interest + leases + other fixed charges | Modern comprehensive analysis |
When to Use FCCR
Evaluating companies with significant lease obligations (retail, airlines)
Assessing leveraged buyout candidates
Loan covenant compliance monitoring
Comparing capital-intensive businesses
Real-World Example: Starbucks vs. Tesla (2023)
Starbucks: 1.8x ($5.4B EBIT + $2.1B leases) ÷ ($0.5B interest + $2.1B leases)
Tesla: 8.4x ($9.5B EBIT + $0.3B leases) ÷ ($0.1B interest + $0.3B leases)
Analysis: Starbucks' ratio reflects its massive store lease obligations
Final Thoughts
The FCCR provides the most complete picture of a company's ability to meet its fixed financial commitments in today's lease-heavy business environment.
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