Coverage of Fixed Charges

Coverage of fixed charges is also sometimes called "times fixed charges earned."

It can be computed by taking your net income, before taxes and fixed charges (debt repayment, long-term leases, preferred stock dividends etc.), and dividing by the amount of fixed charges. The resulting number shows your ability to meet your fixed obligations of all types the higher the number, the better.

Obviously, an inability to meet any fixed obligation of the business threatens your business's well-being. Many working capital loan agreements will specify that you must maintain this ratio at a specified level, so that the lender has some assurance that you'll continue to be able to make your payments.