What Is the Fixed‑Charge Coverage Ratio (FCCR)?
The fixed‑charge coverage ratio (FCCR) measures a company’s ability to meet its fixed, recurring financial obligations (interest, leases and other fixed charges) from operating earnings. It’s a more conservative liquidity/coverage metric than the classic times‑interest‑earned (TIE) ratio because FCCR explicitly includes fixed charges such as lease payments in the coverage calculation.
Key formula (common presentation)
FCCR = (EBIT + Fixed Charges Before Tax) / (Fixed Charges Before Tax + Interest)
Where:
– EBIT = earnings before interest and taxes
– Fixed Charges Before Tax (FCBT) = recurring fixed charges before tax (commonly lease payments, insurance, property taxes, some debt principal/lease principal items depending on lender definition)
– Interest = interest expense
How to calculate FCCR — step‑by‑step practical method
1. Gather financial statements
– Use the company’s latest income statement and notes to the financial statements (and lease schedules if available).
2. Calculate EBIT
– EBIT = operating income (earnings before interest and taxes). Start with operating profit, adjust for unusual or nonrecurring items if you want a normalized FCCR.
3. Identify fixed charges before tax (FCBT)
– Typical elements: operating lease payments (or lease expense under current accounting), insurance, property taxes, some specified portion of rent or other contractual fixed payments. Lenders may also treat scheduled principal on capital/finance leases or required sinking fund deposits as fixed charges. Check the loan document or policy definition—components can vary.
– If the company reports only total lease expense, this is often used as the lease component of FCBT.
4. Determine interest expense
– Use interest expense reported on the income statement (sometimes including interest portion of capital lease payments).
5. Plug into the formula
– Add EBIT + FCBT to get the numerator.
– Add FCBT + interest to get the denominator.
– Compute quotient: FCCR = numerator ÷ denominator. Express as a multiple (e.g., 2.0×).
6. Interpret and stress‑test
– Compare to prior periods, peers, and lender thresholds. Run sensitivity tests (drop EBIT by X%, add one‑time items, or include expected new lease/debt service).
Illustrative example
– EBIT: $300,000
– Lease payments (FCBT component): $200,000
– Interest expense: $50,000
FCCR = (300,000 + 200,000) / (200,000 + 50,000) = 500,000 / 250,000 = 2.0×
Interpretation and practical guidance
– Higher is better: an FCCR above 1.0 means earnings cover fixed charges; higher multiples give more cushion.
– Common benchmarks (industry and lender dependent):
– 1.5–2.0× — generally acceptable; >2.0× shows stronger ability to absorb shocks.
– Use FCCR together with other measures: EBITDA interest coverage (TIE), leverage ratios (debt/EBITDA), free cash flow, liquidity (current ratio, quick ratio), and cash‑flow forecasts.
How lenders use FCCR
– Credit underwriting: lenders often require a minimum FCCR in loan covenants and monitor it periodically.
– Covenant design: typical covenants might require maintaining FCCR above a stated level on a trailing 12‑month basis.
– Stress testing: lenders use FCCR under downside scenarios (revenue decline, higher interest rates, new lease obligations) to assess covenant breach risk.
What FCCR does not capture (limitations)
– Timing of cash flows: FCCR uses accounting earnings (EBIT), which do not reflect the timing of actual cash receipts and payments.
– Capital expenditures and working capital needs: these can materially affect available cash even when FCCR looks acceptable.
– Owner draws and dividends: cash distributions reduce cash available to meet fixed charges but may not be reflected in EBIT.
– Accounting/definition differences: lease accounting standards (e.g., capital/finance vs. operating leases) and lender definitions of fixed charges vary; results depend heavily on what is included in FCBT.
– One‑time items and seasonality: unadjusted EBIT including nonrecurring gains/losses or seasonal swings can mislead.
– Off‑balance sheet or contingent liabilities: FCCR may ignore hidden obligations (guarantees, pending settlements).
Practical tips for analysts, borrowers and lenders
– Always confirm the definition of “fixed charges” used for the calculation (loan docs or internal policy).
– Normalize EBIT for one‑time items, owner draws, or discretionary dividends before computing FCCR for credit decisions.
– Convert lease commitments to a consistent basis if comparing firms across different accounting treatments (consider using rent schedule or converting to on‑balance sheet equivalents when appropriate).
– Run sensitivity analysis (e.g., reduce EBIT by 10–30%, increase interest rate assumptions, add expected future lease contracts).
– Watch trends: a stable or improving FCCR is better than a one‑period high driven by a nonrecurring item.
When to use FCCR vs. other metrics
– Use FCCR when you want a conservative, debt‑service view that includes lease obligations.
– Use TIE (EBIT / interest) when the focus is solely on interest coverage and leases are not material.
– Use EBITDA‑based coverage metrics (e.g., debt/EBITDA, EBITDA/interest) when comparing across companies with different depreciation or lease accounting, or when cash flow proxies are needed.
Bottom line
The fixed‑charge coverage ratio is a focused measure of how well a company’s operating earnings can meet recurring fixed obligations (interest, leases, and other fixed charges). It’s widely used by lenders and credit analysts because it captures obligations that TIE overlooks (notably lease commitments). However, the FCCR should never be used alone — its usefulness depends on accurate identification of fixed charges, normalization of earnings, and complementary analysis of cash flow, leverage, and industry context.
Sources
– Investopedia, “Fixed‑Charge Coverage Ratio (FCCR)”, Candra Huff. Available: https://www.investopedia.com/terms/f/fixed-chargecoverageratio.asp (accessed Oct. 2025).