Glossary - Fixed Charge Coverage Ratio
The Fixed Charge Coverage Ratio (FCCR) is a financial metric used to determine a company's ability to cover its fixed charges, such as interest and lease expenses, with its earnings before interest, taxes, depreciation, and amortization (EBITDA). It is an important measure of financial stability, indicating how well a company can fulfill its fixed financial obligations with its operating income.
Also known as
- Fixed Charge Ratio
Use cases examples
- Loan Agreement: The borrower shall maintain a Fixed Charge Coverage Ratio of not less than 1.25 to 1.00, tested semi-annually, as defined in Section 5.11.
- Financial Covenants Section of Bond Indenture: Issuer will not permit the Fixed Charge Coverage Ratio, as computed on the last day of each fiscal quarter, to be less than 2.0 times.
Considerations for investors
- Investors should evaluate the Fixed Charge Coverage Ratio as part of their due diligence process to assess a company's financial health and its ability to sustain operations through its cash flow.
- An investment's risk profile is influenced by the company's FCCR, where a lower ratio may signal financial distress or a higher risk of default.
Considerations for founders
- Founders should be aware of their company's FCCR requirements when entering into debt agreements or lease arrangements, as failing to meet these ratios can have significant consequences, including defaults.
- Improving operational efficiency and profitability can positively impact the FCCR, making the company more attractive to lenders and investors.
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