Fixed-Charge Coverage Ratio

The fixed-charge coverage ratio divides operating income (EBIT) by total fixed charges (interest, rent, debt principal, and other committed obligations). It is broader than interest-coverage-ratio because it includes all non-negotiable payments.

Fixed-Charge Coverage — key facts

Can operating income cover all fixed payments?


Formula	EBIT ÷ (interest + rent + principal + other fixed charges)
Unit	Times
Benchmark	2.0 or higher healthy
Below 1.5	At risk
Data required	EBIT, all fixed obligations

The intuition

A company has many fixed obligations: interest, lease payments, debt principal, pensions. Interest coverage captures only interest. Fixed-charge coverage is more comprehensive.

A retailer with high rent relative to EBIT might pass interest coverage but fail fixed-charge coverage if you include rent.

How to calculate it

EBIT ÷ (Interest + Rent + Principal due + Other fixed charges).

When it works well

Comprehensive solvency test. Captures all fixed obligations, not just debt.

Evaluating lease intensity. A company with high operating leases (common in retail) will show lower fixed-charge coverage than interest coverage alone.

Assessing distress risk. A company with deteriorating fixed-charge coverage is heading toward trouble.

When it breaks down

Defining “fixed” is subjective. Some charges can be deferred (maintenance, discretionary R&D). Others are truly fixed (debt principal).

It uses EBIT, not cash flow. EBIT can exceed cash flow. A company with high EBIT but negative free cash flow can still be in trouble.