Fixed Charge Coverage Ratio Calculator

Fixed Charge Coverage Ratio (FCCR)

The Fixed Charge Coverage Ratio measures a company’s ability to pay all of its fixed financial obligations from its operating earnings. Lenders use FCCR to assess creditworthiness before approving loans or setting covenants.

Formula:

FCCR = (EBIT + Lease Payments) / (Interest Expense + Lease Payments + Principal Payments / (1 - Tax Rate))

Where:

• EBIT = Earnings Before Interest and Taxes
• Lease payments are added back to the numerator because they reduce EBIT
• Principal repayments are grossed up by (1 - tax rate) because they are paid from after-tax income
• Interest and lease are tax-deductible; principal repayment is not

Simplified version (when no lease payments):

FCCR = EBIT / (Interest Expense + Principal / (1 - Tax Rate))

Interpretation:

FCCR vs DSCR vs Interest Coverage:

• Interest Coverage Ratio = EBIT / Interest (simpler, ignores principal and leases)
• Debt Service Coverage Ratio (DSCR) = Net Operating Income / Total Debt Service (used in real estate)
• FCCR is more conservative than interest coverage because it includes principal repayments

Worked example

A business reports EBIT of $500,000. It pays $80,000 of interest, $60,000 of lease payments, and repays $100,000 of principal, at a 25% tax rate.

Numerator = $500,000 + $60,000 = $560,000 Principal grossed up = $100,000 ÷ (1 − 0.25) = $133,333 Denominator = $80,000 + $60,000 + $133,333 = $273,333 FCCR = $560,000 ÷ $273,333 = 2.05

That clears the usual 1.25 covenant comfortably. The grossing-up step is the one people skip, and skipping it here would give 3.11 instead of 2.05, which is the difference between a covenant that looks safe and one that actually is.

Practical note: A covenant of FCCR ≥ 1.25 is common in commercial loan agreements. If FCCR falls below the covenant minimum, the lender can call the loan or demand additional collateral, so the useful question is not what the ratio is today but how far earnings can fall before it breaks. The calculator works that out for you.