Definition
Fixed charge coverage measures how well cash flow covers fixed obligations like interest and lease payments.
Formula
Fixed charge coverage = (EBIT + fixed charges) / fixed charges
Example
If EBIT is $900k and fixed charges are $300k, coverage is (900 + 300) / 300 = 4.0x.
How to use it
- Use cash-based variants when working capital swings are large.
- Track coverage alongside debt covenants to avoid surprises.
Common mistakes
- Mixing operating leases and capital leases inconsistently.
- Using one-time EBIT without normalization.
Measured as
Fixed charge coverage = (EBIT + fixed charges) / fixed charges
Misused when
- Mixing operating leases and capital leases inconsistently.
- Using one-time EBIT without normalization.
Operator takeaway
- Use cash-based variants when working capital swings are large.
- Track coverage alongside debt covenants to avoid surprises.
- Tie Fixed Charge Coverage to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Loan amortization: how monthly payments and total interest work if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Fixed Charge Coverage belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Loan amortization: how monthly payments and total interest work: A practical guide to loan amortization: monthly payment formula, why interest dominates early, and how term and rate affect total interest.
- Runway and burn: gross vs net burn, working capital, and cash levers: A practical guide to runway: compute net burn, understand why cash differs from profit, and how working capital and collections change runway.