Fixed charge coverage ratio

The fixed charge coverage ratio measures how comfortably a company can cover its recurring fixed obligations, interest expense plus lease payments, out of its earnings. It extends the idea behind the interest coverage ratio to include lease obligations, which function much like debt payments for companies that lease a large share of their stores, equipment, or facilities rather than owning them outright.

The formula is:

A ratio above 1.0 means the company generates enough earnings to cover its interest and lease commitments with room to spare, and the higher the ratio, the more cushion it has if earnings decline. A ratio close to or below 1.0 signals the company is stretched thin, with little buffer between what it earns and what it's obligated to pay out just to service debt and leases, before any spending on growth, dividends, or anything else.

This ratio is especially relevant for retailers, restaurant chains, and airlines, industries where leasing storefronts, equipment, or aircraft is a core part of the business model and where interest coverage alone would understate how much of a company's earnings are already spoken for. Lenders often build fixed charge coverage requirements directly into loan agreements, so a ratio trending toward a company's contractual minimum is a signal worth watching well before it becomes an actual default risk.