Answers the Question
Can we cover our mandatory costs with our income?
Calculator for Fixed-Charge Coverage Ratio
What Is the Fixed-Charge Coverage Ratio?
Also known as the FCCR, this formula examines the ability to pay fixed costs and payments like insurance and leases.
Why Is it Important?
- Many firms, especially those dedicated to producing physical products, have to spend enormous sums on factories, land, and other tangible assets. If such firms can't even pay for these large expenses, they surely won't be able to pay off other expenses too. The larger the value of the fixed-charge coverage ratio, the more easily the fixed-charges will be able to be covered.
Formula(s) to Calculate Fixed-Charge Coverage Ratio
- FIXED CHARGE COVERAGE RATIO = (EARNINGS BEFORE INTEREST AND TAXES + FIXED CHARGES BEFORE TAX) / (FIXED CHARGES BEFORE TAX + INTEREST)
- Assuming that revenue from sales will be at least as high as the variable costs from sales. Companies that are able to cover their fixed costs can still run at a loss.
- Not considering the effects of interest and taxes on overall profitability.
- Assuming that firms with lower ratios are higher risk. Different industries will trend to different ratio levels.
- Assuming that the ratios are static numbers. For instance, firms that are growing rapidly or on the decline may be misrepresented without using projected numbers for income.