Fixed-Charge Coverage Ratio

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Definition of 'Fixed-Charge Coverage Ratio'

The fixed-charge coverage ratio is a financial ratio that measures a company's ability to meet its fixed financial obligations (such as interest payments and lease payments) with its operating income. The ratio is calculated by dividing a company's operating income by its total fixed charges.

A high fixed-charge coverage ratio indicates that a company is generating enough cash flow from its operations to cover its fixed charges. This is considered to be a positive sign, as it suggests that the company is financially healthy and has the ability to meet its debt obligations.

A low fixed-charge coverage ratio, on the other hand, indicates that a company is struggling to generate enough cash flow from its operations to cover its fixed charges. This is considered to be a negative sign, as it suggests that the company may be in financial trouble and may have difficulty meeting its debt obligations.

The fixed-charge coverage ratio is a useful tool for investors and creditors to assess a company's financial health. A high ratio indicates that a company is financially healthy and has the ability to meet its debt obligations. A low ratio, on the other hand, indicates that a company is struggling to generate enough cash flow from its operations to cover its fixed charges and may be in financial trouble.

Here are some additional points to keep in mind about the fixed-charge coverage ratio:

* The fixed-charge coverage ratio is calculated using a company's operating income, which is defined as its net income before interest, taxes, depreciation, and amortization (EBITDA).
* The fixed-charge coverage ratio is often used in conjunction with other financial ratios, such as the debt-to-equity ratio and the interest coverage ratio, to get a more complete picture of a company's financial health.
* The fixed-charge coverage ratio is a dynamic ratio, meaning that it can change over time as a company's financial situation changes.

Overall, the fixed-charge coverage ratio is a useful tool for investors and creditors to assess a company's financial health. However, it is important to keep in mind that the ratio is only one piece of the puzzle and should be used in conjunction with other financial ratios to get a more complete picture of a company's financial health.

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