fixed charge coverage ratio
Definition
Indicates the number of times the interest (on bonds and long-term debt) and lease expenses can be covered by the indebted firm’s earnings (revenue). Since a failure to meet interest payments would mean a default under the terms of a bond indenture, this ratio indicates the available margin of safety. However, too high a ratio (too much safety) indicates an undesirably low level of leverage. Formula: (EBIT + lease expense) ÷ (Interest + lease expense).
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