{"id":31405,"date":"2025-05-21T10:31:23","date_gmt":"2025-05-21T15:31:23","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=31405"},"modified":"2025-12-17T00:18:03","modified_gmt":"2025-12-17T05:18:03","slug":"fixed-charge-coverage-ratio-fccr","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/fixed-charge-coverage-ratio-fccr\/","title":{"rendered":"The Fixed Charge Coverage Ratio (FCCR) in Credit Analysis: Cash Flow Confusion"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">The Fixed Charge Coverage Ratio (FCCR) in Credit Analysis: Cash Flow Confusion<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/fixed-charge-coverage-ratio-fccr\/#How_to_Interpret_the_Fixed_Charge_Coverage_Ratio\">How to Interpret the Fixed Charge Coverage Ratio<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/fixed-charge-coverage-ratio-fccr\/#Fixed_Charge_Coverage_Ratio_vs_Debt_Service_Coverage_Ratio\">Fixed Charge Coverage Ratio vs. Debt Service Coverage Ratio<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/fixed-charge-coverage-ratio-fccr\/#Fixed_Charge_Coverage_Ratio_vs_Interest_Coverage_Ratio_and_Leverage_Ratio\">Fixed Charge Coverage Ratio vs. Interest Coverage Ratio and Leverage Ratio<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/fixed-charge-coverage-ratio-fccr\/#Whats_Wrong_with_the_Fixed_Charge_Coverage_Ratio\">What\u2019s Wrong with the Fixed Charge Coverage Ratio?<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Fixed Charge Coverage Ratio Definition:<\/strong> The Fixed Charge Coverage Ratio (FFCR) measures how easily a company can pay for the interest expense on its Debt, scheduled principal repayments, rent\/lease payments, and other fixed expenses based on its available cash flow after most other recurring spending.<\/p><\/blockquote>\n<p>There are approximately 12,581,712 different definitions of the Fixed Charge Coverage Ratio (FCCR) floating around online, but the two most common seem to be the \u201cAccounting\u201d definition and the \u201cCash Flow\u201d definition:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31406 size-full\" title=\"&quot;Accounting&quot; Definition of the Fixed Charge Coverage Ratio\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101854\/01-Accounting-FCCR.jpg\" alt=\"&quot;Accounting&quot; Definition of the Fixed Charge Coverage Ratio\" width=\"1256\" height=\"600\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101854\/01-Accounting-FCCR.jpg 1256w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101854\/01-Accounting-FCCR-300x143.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101854\/01-Accounting-FCCR-1024x489.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101854\/01-Accounting-FCCR-768x367.jpg 768w\" sizes=\"(max-width: 1256px) 100vw, 1256px\" \/><\/p>\n<p>This \u201caccounting\u201d metric is inconsistent with the definition above because it does not consider scheduled Debt principal repayments in the denominator.<\/p>\n<p>So, we prefer to use the &#8220;cash flow&#8221; definition shown below:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31407 size-full\" title=\"&quot;Cash Flow&quot; Definition of the Fixed Charge Coverage Ratio\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101924\/02-Cash-Flow-FCCR.jpg\" alt=\"&quot;Cash Flow&quot; Definition of the Fixed Charge Coverage Ratio\" width=\"2221\" height=\"727\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101924\/02-Cash-Flow-FCCR.jpg 2221w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101924\/02-Cash-Flow-FCCR-300x98.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101924\/02-Cash-Flow-FCCR-1024x335.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101924\/02-Cash-Flow-FCCR-768x251.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101924\/02-Cash-Flow-FCCR-1536x503.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21101924\/02-Cash-Flow-FCCR-2048x670.jpg 2048w\" sizes=\"(max-width: 2221px) 100vw, 2221px\" \/><\/p>\n<p>Some sources simplify this one and ignore the Rent\/Lease Payments so that it\u2019s more of a <em>Debt Service<\/em> ratio, but this defeats the point of the FCCR.<\/p>\n<p>If you\u2019re going to measure just Debt Service, use the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/debt-service-coverage-ratio\/\" target=\"_blank\" rel=\"noopener\">Debt Service Coverage Ratio<\/a>!<\/p>\n<p>If the company has Preferred Stock, the Preferred Dividends should also be counted in the denominator as part of the \u201cFixed Charges.\u201d<\/p>\n<p>For some companies, you could arguably count <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/dividend-yield\/\" target=\"_blank\" rel=\"noopener\">Common Dividends<\/a> as an ongoing cash outflow deducted in the <em>numerator<\/em>, reducing the available cash flow.<\/p>\n<p><strong>However, the basic principle is always the same: The numerator of this ratio should reflect the \u201cavailable cash flow,\u201d and the denominator should reflect the \u201cfixed charges\u201d the company must pay in each period, regardless of its revenue or overall business activity.<\/strong><\/p>\n<p>The FCCR should always be above 1.0x, indicating the company has enough cash flow to pay for its fixed charges, and the healthiest companies should see ratios of 2.0x, 3.0x, or even 4.0x or higher.<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Financial-Statement-Analysis\/FCCR\/Fixed-Charge-Coverage-Ratio-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Fixed Charge Coverage Ratio &#8211; Slides (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Financial-Statement-Analysis\/FCCR\/LBO-Model-Fixed-Charge-Coverage-Ratio-Example.xlsx\" target=\"_blank\" rel=\"noopener\">Simple LBO Model &#8211; Fixed Charge Coverage Ratio Calculation (XL)<\/a><\/li>\n<\/ul>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>0:37:<\/strong> The Short Version (OK, Not 3 Minutes)<\/li>\n<li><strong>6:28:<\/strong> Part 1: How to Interpret the FCCR in Real Life<\/li>\n<li><strong>9:45:<\/strong> Part 2: FCCR vs. DSCR vs. Leverage and Coverage Ratios<\/li>\n<li><strong>11:54:<\/strong> Part 3: What\u2019s Wrong with the FCCR?<\/li>\n<li><strong>13:42:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Interpret_the_Fixed_Charge_Coverage_Ratio\"><\/span><strong>How to Interpret the Fixed Charge Coverage Ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The Fixed Charge Coverage Ratio is used with other credit metrics, such as the Leverage Ratio (Debt \/ EBITDA) and Interest Coverage Ratio (EBITDA \/ Interest), to determine a company\u2019s credit risk, borrowing limits, and other terms when it issues Debt.<\/p>\n<p>For example, a company projected to achieve an FCCR of 3 \u2013 4x is more likely to get favorable terms on its Debt than a company with an FCCR of 1 \u2013 2x.<\/p>\n<p>That might translate into lower interest rates, fees, or more flexible repayment options.<\/p>\n<p>The FCCR is also used as a <strong>covenant<\/strong>, or \u201crequirement,\u201d in many loan agreements.<\/p>\n<p>For example, if a company issues a Term Loan, the lender might require the company to maintain a 1.5x minimum FCCR while the loan is outstanding.<\/p>\n<p>If it does not, it might have to pay penalty fees or a higher interest rate. In extreme cases, the lender might even call for immediate repayment of the loan.<\/p>\n<p>To illustrate, here\u2019s a simple example of the FCCR calculation for Netflix in a credit model in the Base vs. Extreme Downside cases:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31408 size-full\" title=\"Netflix - FCCR Calculation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102526\/03-Netflix-FCCR-Calculation.jpg\" alt=\"Netflix - FCCR Calculation\" width=\"1837\" height=\"832\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102526\/03-Netflix-FCCR-Calculation.jpg 1837w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102526\/03-Netflix-FCCR-Calculation-300x136.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102526\/03-Netflix-FCCR-Calculation-1024x464.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102526\/03-Netflix-FCCR-Calculation-768x348.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102526\/03-Netflix-FCCR-Calculation-1536x696.jpg 1536w\" sizes=\"(max-width: 1837px) 100vw, 1837px\" \/><\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31409 size-full\" title=\"Netflix - Extreme Downside Case FCCR\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102554\/04-Netflix-Extreme-Downside-FCCR.jpg\" alt=\"Netflix - Extreme Downside Case FCCR\" width=\"1191\" height=\"1421\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102554\/04-Netflix-Extreme-Downside-FCCR.jpg 1191w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102554\/04-Netflix-Extreme-Downside-FCCR-251x300.jpg 251w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102554\/04-Netflix-Extreme-Downside-FCCR-858x1024.jpg 858w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102554\/04-Netflix-Extreme-Downside-FCCR-768x916.jpg 768w\" sizes=\"(max-width: 1191px) 100vw, 1191px\" \/><\/p>\n<p>Based on the FFCR, Netflix is fine even if it delivers <strong>disastrous<\/strong> business results, such as a <em>5% annualized reduction<\/em> in revenue in this Extreme Downside Case.<\/p>\n<p>That\u2019s because the company is not leveraged aggressively (only 2x Debt \/ EBITDA), it de-levers significantly over time, and it doesn\u2019t have many \u201cfixed charges,\u201d with very low rent\/lease payments and interest.<\/p>\n<p><strong>In fact, these results raise more questions about the calculation method than anything else.<\/strong><\/p>\n<p>Specifically, CapEx is not that meaningful for this type of company; it would be more accurate to count some of Netflix\u2019s cash outflows on <strong>content licensing and development<\/strong> in the \u201cFixed Charges\u201d calculation.<\/p>\n<p>If we did that, the FCCR would fall to the ~1x level for Netflix in this Extreme Downside case, indicating likely credit problems.<\/p>\n<p>We get a more <strong>questionable result<\/strong> for the fictional company used in the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/simple-lbo-model-excel\/\" target=\"_blank\" rel=\"noopener\">simple LBO model<\/a> here:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31410 size-full\" title=\"LBO Model - Simple Fixed Charge Coverage Ratio\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102624\/05-LBO-Simple-Fixed-Charge-Coverage-Ratio.jpg\" alt=\"LBO Model - Simple Fixed Charge Coverage Ratio\" width=\"1906\" height=\"607\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102624\/05-LBO-Simple-Fixed-Charge-Coverage-Ratio.jpg 1906w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102624\/05-LBO-Simple-Fixed-Charge-Coverage-Ratio-300x96.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102624\/05-LBO-Simple-Fixed-Charge-Coverage-Ratio-1024x326.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102624\/05-LBO-Simple-Fixed-Charge-Coverage-Ratio-768x245.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102624\/05-LBO-Simple-Fixed-Charge-Coverage-Ratio-1536x489.jpg 1536w\" sizes=\"(max-width: 1906px) 100vw, 1906px\" \/><\/p>\n<p>This company\u2019s FCCR ranges between 1.1x and 1.8x in this forecast period.<\/p>\n<p>This is not a \u201cred flag,\u201d but would draw attention from the lenders.<\/p>\n<p>The company is leveraged quite aggressively \u2013 5x Debt \/ EBITDA on an 8x EBITDA acquisition \u2013 and its cash flows are weaker in the early years as it transitions to a \u201ccapital-light\u201d business model.<\/p>\n<p>Lenders might dig into a result like this, stress-test the model in different scenarios, and evaluate the FCCR if the company\u2019s business model transition takes longer than expected or its margins stagnate or decline.<\/p>\n<p>The Fixed Charge Coverage Ratio lets the lenders <strong>quantify the risk<\/strong> and determine the higher interest rate or fees they might charge to compensate.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Fixed_Charge_Coverage_Ratio_vs_Debt_Service_Coverage_Ratio\"><\/span><strong>Fixed Charge Coverage Ratio vs. Debt Service Coverage Ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/debt-service-coverage-ratio\/\" target=\"_blank\" rel=\"noopener\">Debt Service Coverage Ratio<\/a> and Fixed Charge Coverage Ratio are similar in some ways, but their calculations and usage differ.<\/p>\n<p>Both include the Interest Expense + Scheduled Debt Principal Repayments in the denominator, and the numerator for both metrics measures the \u201ccash flow available\u201d to make these payments.<\/p>\n<p>The DSCR numerator is the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/cash-flow-available-for-debt-service-cfads\/\" target=\"_blank\" rel=\"noopener\">Cash Flow Available for Debt Service<\/a>, while it\u2019s a more loosely defined \u201cavailable cash flow\u201d or \u201cmodified EBITDA\u201d for the FCCR.<\/p>\n<p>The <strong>key differences<\/strong> are:<\/p>\n<ul>\n<li><strong>Usage:<\/strong> The DSCR is more of a <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/\" target=\"_blank\" rel=\"noopener\">Project Finance<\/a> metric used for individual assets, such as solar plants or toll roads, and its definition is straightforward and widely agreed-upon. Also, in addition to credit analysis, the DSCR is used to <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/debt-sculpting-vs-debt-sizing\/\" target=\"_blank\" rel=\"noopener\">size and sculpt Debt<\/a>.<\/li>\n<li><strong>Rent\/Lease Payments: <\/strong>The DSCR does not measure the asset\u2019s ability to pay for these since it relates <em>strictly<\/em> to the Debt. The CFADS in the numerator <em>deducts<\/em> these expenses, but the denominator of the DSCR does not count them at all.<\/li>\n<li><strong>CapEx:<\/strong> The numerator of the FCCR deducts <em>all<\/em> CapEx \u2013 both Growth and Maintenance \u2013 while the CFADS in the numerator of the DSCR deducts only Maintenance CapEx.<\/li>\n<li><strong>Working Capital:<\/strong> This is a minor point, but CFADS normally includes the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/change-in-working-capital\/\" target=\"_blank\" rel=\"noopener\">Change in Working Capital<\/a>, so it affects the DSCR; most FCCR calculations do not account for Working Capital.<\/li>\n<\/ul>\n<p>You could calculate the Debt Service Coverage Ratio for corporations rather than infrastructure assets, but typically it is based on something like:<\/p>\n<p><strong>Corporate DSCR<\/strong> = (Free Cash Flow + Interest\/Rent\/Other Fixed Charges) \/ (Interest\/Rent\/Other Fixed Charges + Scheduled Debt Principal Repayments)<\/p>\n<p>Using Free Cash Flow rather than starting with EBITDA and deducting CapEx and Cash Taxes means a wider variety of line items go into the calculation.<\/p>\n<p>This may be what you want, but be careful because this \u201cCorporate DSCR\u201d is <em>very similar<\/em> to the FCCR in most cases:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31411 size-full\" title=\"Netflix - &quot;Corporate&quot; Debt Service Coverage Ratio (DSCR)\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102711\/06-Netflix-Corporate-DSCR.jpg\" alt=\"Netflix - &quot;Corporate&quot; Debt Service Coverage Ratio (DSCR)\" width=\"1834\" height=\"851\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102711\/06-Netflix-Corporate-DSCR.jpg 1834w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102711\/06-Netflix-Corporate-DSCR-300x139.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102711\/06-Netflix-Corporate-DSCR-1024x475.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102711\/06-Netflix-Corporate-DSCR-768x356.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102711\/06-Netflix-Corporate-DSCR-1536x713.jpg 1536w\" sizes=\"(max-width: 1834px) 100vw, 1834px\" \/><\/p>\n<p>The fact that it\u2019s so different from the FCCR in this Netflix example says more about the possible shortcomings of the FCCR than anything else.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Fixed_Charge_Coverage_Ratio_vs_Interest_Coverage_Ratio_and_Leverage_Ratio\"><\/span><strong>Fixed Charge Coverage Ratio vs. Interest Coverage Ratio and Leverage Ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The Leverage Ratio and Interest Coverage Ratio are much simpler metrics that are defined as Total Debt \/ EBITDA and EBITDA \/ Interest, respectively.<\/p>\n<p>There are variations, such as ratios where you use Net Debt or the Net Interest Expense, and others where you subtract CapEx, the Change in Working Capital, or Cash Taxes from EBITDA, but the fundamentals are simple.<\/p>\n<p>Lenders look at all these metrics when stress-testing a company and considering new deals, and they have the same basic trade-offs as <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/ebitda-to-fcf\/\" target=\"_blank\" rel=\"noopener\">Free Cash Flow vs. EBITDA<\/a>.<\/p>\n<p><strong>One set of metrics is simpler to calculate and better for comparisons (EBITDA, Debt \/ EBITDA, and EBITDA \/ Interest), while the other set is more difficult to calculate, closer to the actual cash flows, but less useful for comparing different companies (Free Cash Flow and the Fixed Charge Coverage Ratio).<\/strong><\/p>\n<p>You can see examples of these ratios for Netflix below:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31412 size-full\" title=\"Netflix - Leverage Ratios and Coverage Ratios\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102741\/07-Netflix-Leverage-Coverage-Ratios.jpg\" alt=\"Netflix - Leverage Ratios and Coverage Ratios\" width=\"1845\" height=\"315\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102741\/07-Netflix-Leverage-Coverage-Ratios.jpg 1845w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102741\/07-Netflix-Leverage-Coverage-Ratios-300x51.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102741\/07-Netflix-Leverage-Coverage-Ratios-1024x175.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102741\/07-Netflix-Leverage-Coverage-Ratios-768x131.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/05\/21102741\/07-Netflix-Leverage-Coverage-Ratios-1536x262.jpg 1536w\" sizes=\"(max-width: 1845px) 100vw, 1845px\" \/><\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Whats_Wrong_with_the_Fixed_Charge_Coverage_Ratio\"><\/span><strong>What\u2019s Wrong with the Fixed Charge Coverage Ratio?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The Fixed Charge Coverage Ratio should be an improvement over the Leverage Ratio and Interest Coverage Ratio because it uses something closer to the company\u2019s <em>true<\/em> <em>cash flow<\/em> to measure its ability to service Debt and pay for rent\u2026<\/p>\n<p>\u2026but it\u2019s not quite that simple in real life.<\/p>\n<p>First, there are dozens of different definitions for the FCCR.<\/p>\n<p>The line items included in \u201cFixed Charges\u201d are not strictly defined, and for some companies, such as Netflix above, CapEx is less meaningful than spending on intellectual property and content.<\/p>\n<p>\u201cFixed Charges\u201d does <strong>not<\/strong> include variable expenses, such as COGS for a manufacturing company, but within the SG&amp;A or R&amp;D categories on a company\u2019s <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/\" target=\"_blank\" rel=\"noopener\">Income Statement<\/a>, you could make cases for and against many different line items.<\/p>\n<p>IFRS 16 and <a href=\"https:\/\/mergersandinquisitions.com\/lease-accounting\/\" target=\"_blank\" rel=\"noopener\">lease accounting<\/a> create further complexities.<\/p>\n<p>For any IFRS-based company, EBITDA <em>already<\/em> excludes the full lease expense, so you do not add it back in the \u201cavailable cash flow\u201d numerator of the FCCR.<\/p>\n<p>But you still add it in the denominator since it still represents a required cash outflow.<\/p>\n<p>If the company follows U.S. GAAP, you <em>do<\/em> add the Operating Lease Expense, normally listed as \u201cRent\u201d on the Income Statement, in the numerator of the FCCR.<\/p>\n<p>Under U.S. GAAP, the Operating Lease Expense is a simple deduction on the Income Statement that directly reduces EBITDA, so you must add it back to determine the \u201cavailable cash flow.\u201d<\/p>\n<p>Finally, there are issues around Common Dividends and Distributions and whether they should be deducted to calculate a company\u2019s \u201cavailable cash flow.\u201d<\/p>\n<p>In some industries, like <a href=\"https:\/\/breakingintowallstreet.com\/kb\/reit-modeling\/\" target=\"_blank\" rel=\"noopener\">equity REITs<\/a>, companies <strong>must<\/strong> issue certain percentages of Dividends to maintain their corporate\/tax\/legal status, so there is a case for doing this.<\/p>\n<p>But in other industries, such as utilities or midstream\/MLP companies in <a href=\"https:\/\/breakingintowallstreet.com\/kb\/oil-gas-modeling\/\" target=\"_blank\" rel=\"noopener\">oil &amp; gas<\/a>, there\u2019s no \u201crequirement\u201d to issue a certain amount of Dividends.<\/p>\n<p>Companies in both industries have historically cut or raised Dividends when required, so it\u2019s more difficult to argue they are true fixed charges.<\/p>\n<p>For all these reasons, the Fixed Charge Coverage Ratio works well in theory but sometimes struggles to perform in real life.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Fixed Charge Coverage Ratio (FFCR) measures how easily a company can pay for the interest expense on its Debt, scheduled principal repayments, rent\/lease payments, and other fixed expenses based on its available cash flow after most other recurring spending.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-31405","biws_kb","type-biws_kb","status-publish","hentry","kb_category-financial-statement-analysis"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/31405","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=31405"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}