Fixed Charge Coverage Ratio
The Fixed Charge Coverage ratio, also called the Earnings to Fixed Charges ratio, includes all fixed financing
charges, which consist of operating lease and short-term lease obligations, principal repayments on loans, and lease liability (principal) payments on finance leases.
| Fixed Charge Coverage (Earnings to Fixed Charges) Ratio = | Earnings Before Fixed Charges and Taxes |
| Fixed Charges |
“Fixed charges” are all contractually committed payments on both debt and leases, as follows:
- Interest and principal payments on debt
- Interest and lease liability (principal) payments on finance leases
- Total operating and short-term lease payments
Earnings Before Fixed Charges and Taxes, the Numerator of the Fixed Charge Coverage Ratio
The numerator, earnings before fixed charges and taxes, is calculated as:
| EBIT (Earnings Before Interest and Taxes) | |
| + | Operating and short-term lease payments expensed |
| = | Earnings before fixed charges and taxes |
Fixed Charges, the Denominator of the Fixed Charge Coverage Ratio
The denominator, fixed charges, is calculated as:
| Interest expense on loans and finance leases | |
| + | Required principal payments on loans and lease liability (principal) payments on finance leases |
| + | Total payments on operating and short-term leases |
| = | Fixed charges |