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Learn how the Fixed Charge Coverage Ratio measures a company’s ability to meet fixed financial obligations beyond interest expenses.
The Fixed Charge Coverage Ratio assesses a company’s ability to meet fixed financial commitments like interest and lease payments. It offers a broader view of solvency compared to traditional coverage ratios. A higher FCCR generally indicates greater ability to meet fixed obligations.
The standard formula to calculate FCCR is:
FCCR = (EBIT + Fixed Charges) / (Fixed Charges + Interest Expenses)
Where:
EBIT = Earnings Before Interest and Taxes
Fixed Charges = Expenses like lease payments, insurance, or preferred dividends
Interest Expenses = Periodic debt servicing costs
This formula helps determine whether a company generates enough pre-tax income to cover its fixed commitments.
Under accounting standards (GAAP-based approach), FCCR focuses on operating income rather than cash flow:
FCCR (Accounting Version) = (EBIT + Fixed Charges) / (Fixed Charges + Interest)
It considers depreciation, accruals, and other non-cash items that appear in EBIT.
Used primarily in financial statement analysis for creditworthiness.
Credit analysts often use a cash-based version of FCCR to reflect liquidity:
FCCR (Cash Flow Version) = (EBITDA + Fixed Charges) / (Fixed Charges + Interest Payments)
Where:
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortisation
This variation shows a clearer picture of whether a company’s cash earnings can sustain its financial commitments, particularly for lease-heavy or capital-intensive industries.
Here’s how to interpret different Fixed-Charge Coverage Ratio levels to assess a company’s financial stability:
An FCCR greater than 1 means the company earns more than enough to cover its fixed obligations.
A ratio equal to 1 indicates just enough coverage — any drop in earnings could cause payment pressure.
A ratio below 1 signals that the firm cannot fully cover its fixed charges, suggesting potential solvency risk.
Here’s a general benchmark for evaluating whether a company’s Fixed-Charge Coverage Ratio indicates financial comfort or strain:
| FCCR Range | Interpretation |
|---|---|
Above 2.0 |
Strong ability to meet fixed charges |
1.5 – 2.0 |
Adequate coverage, moderate risk |
1.0 – 1.5 |
Tight coverage, higher risk |
Below 1.0 |
Insufficient income to cover obligations |
Note: The above ranges are indicative and may vary across industries and lending institutions. SEBI or RBI do not prescribe specific FCCR thresholds.
Consider the following illustration:
Example 1: Accounting-Based FCCR
A company reports:
EBIT = ₹300 crore
Interest Expense = ₹80 crore
Lease Payments (Fixed Charges) = ₹40 crore
FCCR = (EBIT + Fixed Charges) / (Fixed Charges + Interest)
FCCR = (300 + 40) / (40 + 80)
FCCR = 340 / 120 = 2.83
Interpretation:
The firm earns 2.83 times more than its total fixed obligations — an indicator of adequate solvency.
Example 2: Cash Flow Version
Using EBITDA instead of EBIT:
EBITDA = ₹350 crore
Interest Payments = ₹80 crore
Lease Payments = ₹40 crore
FCCR (Cash Flow) = (EBITDA + Fixed Charges) / (Interest + Fixed Charges)
FCCR = (350 + 40) / (80 + 40)
FCCR = 390 / 120 = 3.25
Interpretation:
Cash-based coverage indicates stronger cash flow support due to non-cash adjustments.
Here’s how the Fixed-Charge Coverage Ratio is applied in credit evaluation and financial planning:
Lenders and rating agencies rely on FCCR to judge debt repayment capacity.
A high ratio indicates low default risk.
Banks often set minimum FCCR thresholds (e.g., 1.25×) that borrowers must maintain to avoid covenant breaches.
Companies use FCCR to evaluate the impact of new debt or lease agreements on their solvency.
Analysts compare FCCRs across peers within the same sector to gauge financial resilience.
Here are the key limitations to consider when analysing the Fixed-Charge Coverage Ratio:
Excludes Non-Cash Liabilities: Depreciation and deferred costs may distort true ability to pay.
Industry Variation: Asset-heavy industries naturally have lower FCCRs due to high fixed costs.
Ignores Seasonality: Quarterly FCCRs can fluctuate widely for cyclical businesses.
EBIT-Based Distortion: Accounting differences between EBIT and cash flows may misrepresent liquidity.
No Standard Benchmark: Acceptable ratios differ by lender and industry norms.
The Fixed Charge Coverage Ratio (FCCR) provides a clear view of how comfortably a company can meet its fixed financial obligations using operating profits. It bridges profitability and solvency, making it useful for both lenders and internal financial evaluations.
FCCR is a powerful metric to evaluate how well a company can handle its fixed costs from ongoing operations.
Ratios above 2.0 are typically associated with adequate solvency and repayment capacity.
For lenders, it’s a vital measure of credit risk; for management, it's considered for debt optimisation.
Both EBIT-based and cash flow-based versions should be reviewed for a complete picture.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
The Fixed Charge Coverage Ratio (FCCR) measures how many times a company’s earnings can cover its fixed financial commitments, such as lease payments and interest expenses. It reflects the firm’s ability to meet recurring obligations using operating income.
The ratio is calculated using the formula:
FCCR = (EBIT + Fixed Charges) ÷ (Fixed Charges + Interest Expenses).
It shows whether a company’s earnings before interest and tax are sufficient to service its fixed financial costs.
An FCCR below one indicates that a company’s earnings are insufficient to meet its fixed financial obligations. This suggests potential cash flow stress and a higher risk of default if additional support or cost reductions are not implemented.
Lenders and creditors use FCCR to evaluate a borrower’s repayment capacity and financial resilience. It is often included in loan covenants to ensure the borrower maintains adequate income coverage over fixed costs throughout the loan period.
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