Financial modelling terms explained

Fixed Charge Coverage Ratio

The fixed charge coverage ratio is a term used in financial modeling to determine the level of financial risk associated with a company. It is a financial ratio used by lenders and investors to determine whether a company has enough cash flows to cover its fixed expenditures, such as rent and interest payments, over the course of a year.

What is the Fixed Charge Coverage Ratio?

The Fixed Charge Coverage Ratio is a measure of a company's ability to pay its fixed costs. This ratio is calculated by dividing a company's operating cash flow by its fixed charges. This ratio is used to measure a company's ability to cover its fixed costs, such as interest payments and lease payments. A higher ratio indicates that a company is better able to cover its fixed costs.

How Do You Calculate the Fixed Charge Coverage Ratio?

The fixed charge coverage ratio measures a company's ability to cover its fixed charges with its operating cash flow. This ratio is calculated by dividing a company's operating cash flow by its fixed charges.

A high fixed charge coverage ratio indicates that a company is able to cover its fixed charges with its operating cash flow, while a low fixed charge coverage ratio indicates that a company is not able to cover its fixed charges with its operating cash flow.

The fixed charge coverage ratio is important for investors because it indicates a company's ability to repay its debt. A company with a high fixed charge coverage ratio is less likely to default on its debt, while a company with a low fixed charge coverage ratio is more likely to default on its debt.

What's the Difference Between the Fixed Charge Coverage Ratio and the Payout Ratio?

There is a big difference between the fixed charge coverage ratio and the payout ratio. The payout ratio is the percentage of a company's net income that is paid out to shareholders as dividends. The fixed charge coverage ratio is the ratio of a company's cash flow available to cover its fixed charges. The fixed charges are interest payments, principal payments, and lease payments.

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