Fixed Charge Coverage Ratio Calculator
| 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
| Date | EBIT | Fixed Charges | Interest | Coverage Ratio | Currency | Actions |
|---|
Fixed Charge Coverage Ratio: Your Complete Guide
Learn how to measure your business's ability to cover fixed expenses like interest and leases
Simple explanations, real examples, and a free calculator to help you understand this important financial metric
What is Fixed Charge Coverage Ratio?
Imagine you're running a business. Every month, you have certain fixed expenses that you absolutely must pay - like rent for your office space, interest on your business loans, insurance premiums, and lease payments for equipment. The Fixed Charge Coverage Ratio tells you how easily your business can cover these mandatory expenses.
Simple Analogy
Think of it like your personal budget: If you earn $5,000 per month and your rent, car payment, and minimum debt payments total $2,000, you have a coverage ratio of 2.5 ($5,000 ÷ $2,000). This means you could cover your fixed expenses 2.5 times over.
Why It Matters
Lenders use this ratio to decide if they should give you a loan. A higher ratio means your business is safer for lenders, which could get you better interest rates.
The Simple Formula
Coverage Ratio = (EBIT + Fixed Charges) ÷ (Fixed Charges + Interest)
What's a Good Number?
Generally, a ratio above 1.5 is good, above 2.0 is strong, and below 1.0 means you're struggling to cover fixed expenses.
Understanding the Calculator Fields
Let's break down each field in our calculator with simple examples:
EBIT (Earnings Before Interest and Taxes)
What it is: Your business's profit from operations before paying interest on loans and taxes to the government.
Simple example: Your coffee shop makes $200,000 in sales, spends $120,000 on coffee beans, staff salaries, and rent, leaving you with $80,000 in operating profit. That's your EBIT.
Why it matters: This is the money available to cover your fixed charges.
Fixed Charges
What it is: Regular expenses that you must pay, regardless of how well your business is doing.
Common examples:
- Lease payments for equipment or vehicles
- Rent for your office or store
- Insurance premiums
- Long-term service contracts
Simple example: Your business pays $2,000/month for office rent, $500/month for equipment lease, and $300/month for insurance = $2,800/month or $33,600/year in fixed charges.
Interest Expense
What it is: The cost of borrowing money - what you pay the bank for your business loans.
Simple example: You borrowed $100,000 at 5% interest. Each year, you pay $5,000 in interest to the bank.
Important: This is often the largest fixed charge for many businesses.
The Complete Formula Explained
Formula: Fixed Charge Coverage Ratio = (EBIT + Fixed Charges) ÷ (Fixed Charges + Interest Expense)
Breaking it down:
- Top part (EBIT + Fixed Charges): All the money available to cover fixed obligations
- Bottom part (Fixed Charges + Interest): All the fixed obligations you need to cover
- The result: How many times you can cover your fixed charges
Real Business Example: "Joe's Coffee Shop"
Joe's Coffee Shop has:
- EBIT: $80,000 (profit from selling coffee)
- Fixed Charges: $33,600 (rent, equipment leases, insurance)
- Interest Expense: $5,000 (loan for coffee machines)
Calculation: ($80,000 + $33,600) ÷ ($33,600 + $5,000) = $113,600 ÷ $38,600 = 2.94
What this means: Joe's Coffee Shop can cover its fixed charges almost 3 times over! This is very strong and would make lenders happy.
How to Interpret Your Results
| Ratio Range | What It Means | Action Needed |
|---|---|---|
| Below 1.0 | Your business cannot reliably cover fixed charges | Immediate attention required |
| 1.0 - 1.5 | Barely covering fixed charges - little room for error | Work on improving profitability |
| 1.5 - 2.5 | Adequate coverage - comfortable but not exceptional | Monitor regularly, aim to improve |
| Above 2.5 | Strong coverage - lenders will be impressed | Consider expansion or investment |
Pro Tip: Industry Matters
Different industries have different "normal" ratios. A manufacturing business might have a lower acceptable ratio than a software company. Always compare with similar businesses in your industry.
How to Improve Your Fixed Charge Coverage Ratio
Increase EBIT
- Increase sales through marketing
- Raise prices if possible
- Reduce operating costs
- Improve efficiency
Reduce Fixed Charges
- Renegotiate lease terms
- Shop for better insurance rates
- Consolidate debt to lower interest
- Cancel unnecessary subscriptions
Restructure Debt
- Refinance high-interest loans
- Extend loan terms to lower payments
- Consolidate multiple loans
- Negotiate with lenders
Try Our Fixed Charge Coverage Ratio Calculator
Enter your business numbers to instantly calculate your coverage ratio and see how healthy your business is from a lender's perspective.
Frequently Asked Questions (15 Common Questions)
1. What's the difference between Fixed Charge Coverage and Interest Coverage Ratio?
Interest Coverage Ratio only looks at interest expenses. Fixed Charge Coverage is stricter - it includes ALL fixed charges (interest + leases + insurance + other mandatory payments). Think of it as a more complete picture of your business's financial health.
2. What counts as a "fixed charge"?
Any expense you must pay regularly, regardless of business performance. Common examples: loan interest, lease/rent payments, insurance premiums, long-term contract payments, and equipment leases.
3. What's a good Fixed Charge Coverage Ratio?
Generally: Below 1.0 = Warning, 1.0-1.5 = Marginal, 1.5-2.5 = Adequate, Above 2.5 = Strong. However, this varies by industry - capital-intensive businesses might have lower acceptable ratios.
4. How often should I calculate this ratio?
At least quarterly for established businesses, monthly for startups or businesses with tight cash flow. Regular tracking helps you spot trends early.
5. Can this ratio be too high?
Yes, extremely high ratios (like 10+) might mean you're too conservative with debt. Some debt can help grow your business faster. The goal is balance, not necessarily the highest possible number.
6. How do lenders use this ratio?
Lenders look at this ratio to decide: 1) If they should lend to you, 2) How much they can lend, 3) What interest rate to charge. Better ratio = better loan terms.
7. What if my ratio is below 1.0?
This is a red flag. Your business cannot reliably cover its fixed expenses. You need to either increase profits, reduce fixed costs, or both. Consider consulting a financial advisor.
8. Does this ratio include taxes?
No, that's why it's called "EBIT" (Earnings Before Interest and Taxes). Taxes aren't included because they vary widely and aren't considered a fixed operating expense in this calculation.
9. How can I quickly improve my ratio?
Two fastest ways: 1) Renegotiate leases or consolidate debt to lower monthly payments, 2) Focus on high-margin products/services to boost EBIT quickly.
10. Should I include employee salaries as fixed charges?
No, salaries are operating expenses, not fixed charges. They're included in the EBIT calculation (as part of costs to generate revenue) but not as separate fixed charges.
11. What's the minimum ratio banks usually require?
Most commercial lenders want to see at least 1.25-1.5, though this varies by lender, industry, and economic conditions. Some conservative lenders might require 2.0 or higher.
12. How does this ratio differ by industry?
Manufacturing companies often have lower ratios (1.5-2.0) because they have lots of equipment leases. Service businesses might have higher ratios (2.5-3.5) with fewer fixed charges.
13. Can seasonal businesses use this ratio?
Yes, but calculate it using annual figures rather than monthly. Using a bad month could give a misleading picture. Look at your whole year's performance.
14. Is this ratio relevant for small businesses?
Absolutely! Small businesses often rely more on loans and leases. Knowing your coverage ratio helps you manage debt wisely and position your business for growth.
15. How does this calculator handle different currencies?
Our calculator works with over 45 currencies! Just select your currency - the calculator automatically formats and converts values for consistent calculations.