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.
