what does the fixed charge coverage ratio tell you 
the fixed charge ratio is used by lenders looking to analyze the amount of cash flow a company has available for debt repayment a low ratio often reveals a lack of ability to make payments on fixed charges a scenario that lenders try to avoid since it increases the risk that they will not be paid back to avoid this risk many lenders use coverage ratios including the times interest earned tie ratio and the fixed charge coverage ratio to determine a company s ability to take on and pay for additional debt a company that can cover its fixed charges at a faster rate than its peers is not only more efficient but also more profitable this is a company that wants to borrow to finance growth rather than to get through a hardship a company s sales and the costs related to its sales and operations make up the information shown on its income statement some costs are variable costs and dependent on the volume of sales over a particular time period as sales increase so do the variable costs other costs are fixed and must be paid regardless of whether or not the business has activity these fixed costs can include items such as equipment lease payments insurance payments installment payments on existing debt and preferred dividend payments example of the fixed charge coverage ratio in usethe goal of computing the fixed charge coverage ratio is to see how well earnings can cover fixed charges this ratio is a lot like the tie ratio but it is a more conservative measure taking additional fixed charges including lease expenses into consideration the fixed charge coverage ratio is slightly different from the tie though the same interpretation can be applied the fixed charge coverage ratio adds lease payments to earnings before income and taxes ebit and then divides by the total interest and lease expenses let s say company a records ebit of 300 000 lease payments of 200 000 and 50 000 in interest expense the calculation is 300 000 plus 200 000 divided by 50 000 plus 200 000 which is 500 000 divided by 250 000 or a fixed charge coverage ratio of 2 the company s earnings are two times greater than its fixed costs which is considered low that s because the company would only be able to pay the fixed charges twice with the earnings it has increasing the risk that it cannot make future payments the higher this ratio is the better like the tie ratio the higher the fccr the better limitations of the fixed charge coverage ratiothe fccr doesn t consider rapid changes in the amount of capital for new and growing companies the formula also doesn t consider the effects of funds taken out of earnings to pay an owner s draw or pay dividends to investors these events affect the ratio inputs and can give a misleading conclusion unless other metrics are also considered for this reason when banks evaluate a company s creditworthiness for a loan they typically look at several other benchmarks in addition to the fixed charge coverage ratio this gives them a more complete view of the company s financial condition 