Fixed-Charge Coverage

fixed-charge coverage

The number of times that a firm's operating income exceeds its fixed payments. Fixed-charge coverage is a measure of a firm's ability to meet contractually fixed payments, with high coverage indicating significant flexibility for making payments in the event that business conditions deteriorate and earnings decline. Expenses used in calculating fixed-charge coverage usually include interest, lease payments, preferred dividends, and principal payments on debt. Also called times fixed charges. Compare interest coverage.

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Fixed-Charge Coverage

A measure of a company's ability to pay its fixed liabilities. It is calculated by subtracting its fixed payments from its operating income. High fixed-charge coverage indicates that the company can easily make its payments and indeed is able to set funds aside to do so in the event that its income declines. Low fixed-charge coverage means that the company can make its payments but has less flexibility in doing so. A negative measure indicates that the company cannot pay its fixed liabilities. The payments included in this calculation are lease payments, dividends on preferred stock, and debt service. It is also called times fixed charges.