Fixed Charge Coverage Ratio Calculator

How does this fixed charge coverage ratio calculator work?

Fixed charge coverage ratio (FCC) is a solvency ratio which indicates whether the figure of the earnings before interest, taxes and lease payments is at a level considered sufficient to cover the fixed charges an entity should pay in due time (leasing and interest expenses).  

The formula used by this fixed charge coverage ratio calculator is explained in the following line:

FCC = (EBIT + Fixed charge before tax) / (Fixed charge before tax + Interest payment)

Where:

EBIT = Earnings before interest and taxes

Fixed charges before taxes does note include the interest portion.

In the specialty literature the FCC formula can also be found as:

• FCC = (Earnings before interest and taxes + Lease expense) / (Interest expense + Lease expense)

• FCC = (EBIT + Lease Payments other than Interest Portion) / (Interest Payments + Lease Payments)

Even though thefixed charge coverage ratio (FCC) may be perceived similar to interest coverage ratio (IC) there is a difference between the two, since in addition to interest payments the first one considers the yearly obligations on account of lease payments too.

The interpretation of the fixed charge coverage ratio level

This financial indicator is typically used by lenders and creditors in assessing the capacity of a prospective borrower to repay its fixed charges considering its EBIT figure. Thus the higher the ratio, the better as it is considered a positive signal for the solvency of the entity in question.

In case the ratio is low, it is perceived as a strong signal that in case of a negative evolution of the profits, the business will face problems in paying its fixed charges.

Example of a fixed charge coverage ratio calculation

Let’s consider that a retailer has:

• Earnings before interest and taxes = $100,000

• Fixed charge before tax = $10,000

• Interest payment = $5,000

This will result in a FCC of  7.33 (OR 733.33%).