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CandleFocus Glossary Editor
What is Fixed-Charge Coverage Ratio?
The Fixed-Charge Coverage Ratio (FCCR) is a metric used by lenders as a measure of a company’s overall creditworthiness. It is a measure of the ability of a company’s earnings to cover its fixed charges. These fixed charges typically include rent, utilities, and debt payments. The fixed-charge coverage ratio is calculated by dividing the earnings before interest, taxes, depreciation, and amortization (EBITDA) by the sum of the company’s fixed charges and interest expenses.
The FCCR is a fundamental measure of a company’s fiscal performance, as it demonstrates how well a company can manage its fixed payments. Generally, a higher FCCR ratio result indicates that a firm can adequately cover its fixed costs with its current earnings. FCCR can be used to determine the sustainability of a company's current financial position, as it lends insight into its potential to meet future fixed expenses.
Different business sectors have different standards for the FCCR, which can vary depending on the industry. For example, a company in the hospitality industry may have an acceptable FCCR ratio of 1.50, while a company in the retail industry may require a ratio of 1.75 or higher. A ratio of less than 1.00 expressed as a negative FCCR indicates that a company does not have enough revenue to cover its fixed charges, indicating a potential for financial distress.
In addition, the FCCR can be used to compare different companies’ financial performance. When comparing two firms of similar industries, a higher FCCR indicates a stronger financial health and better ability to cover their fixed payments. Lenders often use the FCCR to assess the overall creditworthiness of a company and its ability to meet future repayment obligations.
In conclusion, the fixed-charge coverage ratio is a useful metric that can assist lenders in assessing a company’s overall creditworthiness. It helps reveal the ability of a company’s earnings to cover fixed charges such as rent, utilities, and debt payments. Furthermore, comparing FCCRs can give lenders insight into the relative financial stability of two companies in order to assess their credit risk.
The Fixed-Charge Coverage Ratio (FCCR) is a metric used by lenders as a measure of a company’s overall creditworthiness. It is a measure of the ability of a company’s earnings to cover its fixed charges. These fixed charges typically include rent, utilities, and debt payments. The fixed-charge coverage ratio is calculated by dividing the earnings before interest, taxes, depreciation, and amortization (EBITDA) by the sum of the company’s fixed charges and interest expenses.
The FCCR is a fundamental measure of a company’s fiscal performance, as it demonstrates how well a company can manage its fixed payments. Generally, a higher FCCR ratio result indicates that a firm can adequately cover its fixed costs with its current earnings. FCCR can be used to determine the sustainability of a company's current financial position, as it lends insight into its potential to meet future fixed expenses.
Different business sectors have different standards for the FCCR, which can vary depending on the industry. For example, a company in the hospitality industry may have an acceptable FCCR ratio of 1.50, while a company in the retail industry may require a ratio of 1.75 or higher. A ratio of less than 1.00 expressed as a negative FCCR indicates that a company does not have enough revenue to cover its fixed charges, indicating a potential for financial distress.
In addition, the FCCR can be used to compare different companies’ financial performance. When comparing two firms of similar industries, a higher FCCR indicates a stronger financial health and better ability to cover their fixed payments. Lenders often use the FCCR to assess the overall creditworthiness of a company and its ability to meet future repayment obligations.
In conclusion, the fixed-charge coverage ratio is a useful metric that can assist lenders in assessing a company’s overall creditworthiness. It helps reveal the ability of a company’s earnings to cover fixed charges such as rent, utilities, and debt payments. Furthermore, comparing FCCRs can give lenders insight into the relative financial stability of two companies in order to assess their credit risk.