What Is the Fixed-Charge Coverage Ratio (FCCR)? Formula and Calculation

By Markets & Investing DeskUpdated Nov 10, 2026

Definition

The fixed-charge coverage ratio measures how many times a company's earnings can pay its fixed charges, such as interest and lease or rent payments, that come due regardless of sales.

Key takeaways

FCCR is a solvency measure. The textbook formula is (EBIT + fixed charges before tax) ÷ (fixed charges before tax + interest).
It is broader than the times interest earned (TIE) ratio because it counts lease payments and other fixed costs, not just interest.
Lenders use it to judge cash flow available for debt repayment, and loan agreements often write their own definition.
It reflects a single period and can be distorted by fast capital changes, owner draws and dividends.

The fixed-charge coverage ratio (FCCR) measures how many times a company’s earnings can pay its fixed charges: the obligations that come due whether sales rise or fall, such as interest, lease or rent payments, and in some versions scheduled debt principal and preferred dividends.

The FCCR Formula

The standard form of the formula is:

FCCR = (EBIT + FCBT) ÷ (FCBT + i)

where:

EBIT = earnings before interest and taxes
FCBT = fixed charges before tax (lease payments, rent and similar fixed obligations other than interest)
i = interest expense

Fixed costs such as equipment leases, rent, insurance and debt payments must be paid regardless of sales volume. EBIT has already had lease expense subtracted, so the formula adds it back to show the earnings available before any fixed charge is paid. Interest is not added back because EBIT is already measured before interest. The denominator then gathers every fixed charge the company owes for the period.

How to Calculate the Fixed-Charge Coverage Ratio

Start with EBIT from the income statement (operating income is a common stand-in).
Add back fixed charges that were deducted to reach EBIT, typically lease and rent expense.
Total the fixed charges: interest expense plus those same lease and rent payments.
Divide the adjusted earnings (step 2) by total fixed charges (step 3).

Example of the FCCR Calculation

Hypothetical Company A reports EBIT of $300,000, lease payments of $200,000 and interest expense of $50,000.

Numerator: $300,000 + $200,000 = $500,000
Denominator: $50,000 + $200,000 = $250,000
FCCR: $500,000 ÷ $250,000 = 2.0x

Company A’s pre-charge earnings are twice its fixed obligations. Compare that with the TIE ratio for the same company: $300,000 ÷ $50,000 = 6.0x. The interest-only measure looks far more comfortable because it ignores the $200,000 of lease payments, which are just as unavoidable as the interest. This is why FCCR is considered the more conservative of the two for businesses that lease stores, vehicles or equipment.

Preferred dividends

When preferred dividends are treated as a fixed charge, analysts usually gross them up to a pre-tax amount, because they are paid from after-tax income while the rest of the formula is pre-tax. The adjustment is preferred dividends ÷ (1 − tax rate). Assuming a 25% tax rate, $30,000 of preferred dividends becomes $40,000 in the denominator.

How Lenders Use FCCR

Banks look at FCCR when deciding whether to lend and how much. It shows whether the borrower generates enough earnings to service all fixed obligations, including the new loan, with room left over. A falling ratio signals that a larger share of earnings is already committed, which leaves less margin if revenue drops.

In commercial lending, FCCR is frequently written into the loan agreement as a covenant: the borrower must keep the ratio at or above a stated minimum, tested at set intervals. These agreements usually define the ratio themselves, and the definition can differ substantially from the textbook version. A lender-style FCCR may look like this:

(EBITDA − unfinanced capital expenditures − cash taxes − distributions) ÷ (scheduled principal + interest + lease or rent payments)

This version measures cash available after spending the business cannot easily skip, and it counts principal repayments, which the textbook formula leaves out.

Hypothetical Company B has EBITDA of $900,000, capital expenditures of $150,000, cash taxes of $100,000 and owner distributions of $50,000, giving $600,000 in the numerator. Its scheduled principal is $250,000, interest is $100,000 and rent is $150,000, giving $500,000 in the denominator. The lender-style FCCR is $600,000 ÷ $500,000 = 1.2x. A borrower checking covenant compliance must use the exact formula in its credit agreement.

Interpreting the Ratio

Below 1.0x: earnings did not cover fixed charges for the period; the shortfall had to come from cash reserves, asset sales or new financing.
At 1.0x: earnings exactly covered fixed charges, with no cushion.
Above 1.0x: each increment shows how far earnings could fall before fixed charges go uncovered. At 2.0x, pre-charge earnings could roughly halve before the company stops covering its obligations.

Higher is better from a creditor’s point of view. What counts as adequate depends on the industry, the stability of earnings and, for borrowers, the lender’s covenant level. Comparing a company with its own history and sector peers says more than any single number.

Limitations of the Fixed-Charge Coverage Ratio

Rapid capital changes. New and fast-growing companies can raise or spend capital quickly, so a ratio built on last period’s earnings may not reflect next period’s obligations.
Owner draws and dividends. The textbook formula ignores money taken out of earnings for an owner’s draw or investor dividends. For closely held businesses, including pass-through entities such as an LLC, those withdrawals can be large, which is one reason lender versions subtract distributions.
Principal is excluded in the standard form. A company with heavy loan amortization can show a healthy textbook FCCR while struggling to make full debt payments.
Accounting effects. EBIT includes non-cash items, and lease accounting rules (ASC 842 in the U.S., IFRS 16 internationally) change how lease costs appear. Under IFRS 16, most lease costs show up as depreciation and interest rather than rent, which shifts inputs between the numerator and denominator.
One period only. Seasonal businesses can look strong or weak depending on the measurement window.

Ratio	Formula	What it covers
Times interest earned (TIE)	EBIT ÷ interest	Interest only
Fixed-charge coverage (FCCR)	(EBIT + FCBT) ÷ (FCBT + interest)	Interest plus leases and other fixed charges
Debt service coverage (DSCR)	Net operating income ÷ total debt service	Interest plus principal on debt

FCCR and DSCR are often confused. DSCR focuses on debt payments (principal and interest) and is common in real estate and project lending. FCCR is built around the broader set of fixed obligations, especially leases. Lender-style FCCR definitions that include principal overlap heavily with DSCR, but they still add lease and rent payments to the denominator.

FAQs

Does the FCCR include taxes?

The textbook formula does not: both sides are pre-tax. Lender-defined versions often subtract cash taxes paid from the numerator, because taxes reduce the cash actually available for fixed charges.

Is amortization of deferred financing costs included in interest?

Only if the agreement says so. Amortization of deferred financing costs is a non-cash charge reported within interest expense, and many credit agreements count only cash interest in fixed charges. For covenant purposes, the credit agreement's definition of interest expense governs the answer.

The Bottom Line

FCCR matters most to lenders and to businesses that lease stores, vehicles or equipment, since it counts lease costs that the interest-only TIE ratio ignores. Borrowers with a covenant should calculate the ratio with the exact formula in their credit agreement, which often subtracts capital spending and distributions and adds principal. Judge any result against the company's own history, sector peers and the lender's minimum.