When unfunded capital expenditures and distributions are higher, the resulting fixed charge coverage ratio will be lower. Those figures are subtracted from earnings before interest and taxes, making the earnings before interest and taxes (EBIT) value smaller.
Lease payments and interest payments are included in the fixed charge coverage ratio. Both payments must be met annually. For companies that have extensive expenses for leasing equipment, the fixed charge coverage ratio is an extremely important financial metric. To calculate the ratio, interest expense, taxes and EBIT are all taken from a company’s income statement, and the lease payments is taken from the company’s balance sheet. The fixed charge coverage ratio indicates the number of times a company is capable of covering its yearly fixed charges. When the ratio's value is high, it is a sign that the company's debt situation is in a healthier state. The only true way to determine if the ratio's value is good or bad requires the use of historical information from the company or the use of comparable industrywide data.
The fixed charge coverage ratio is a solvency ratio that represents the sufficiency of EBIT to cover all interest and lease payments. When a company incurs a significant amount of debt and must make regular and continuous interest payments, its cash flow can be largely consumed by such costs. The fixed charge coverage ratio is highly adaptable for use with any type of fixed cost; it's easy to factor in costs such as insurance and lease payments, as well as preferred dividend payments.
The fixed charge coverage ratio is similar to the interest coverage ratio. The significant difference between the two is that the fixed charge coverage ratio accounts for the yearly obligations of lease payments in addition to interest payments. This ratio is sometimes viewed as an expanded version of the times interest coverage ratio or the times interest earned ratio. If the resulting value of this ratio is low, less than 1, it is a strong indication that any significant decrease in profits could bring about financial insolvency for a company. A high ratio is indicative of a greater level of financial soundness for a company.
The fixed charge coverage ratio is often used as an alternative solvency ratio to the debt service coverage ratio (DSCR). In terms of corporate finance, the debt service coverage ratio determines the amount of cash flow a business has readily accessible to meet all yearly interest and principal payments on its debt, including payments on sinking funds. If a company's DSCR is less than 1, the company has a negative amount of cash flow. A DSCR of 0.92, for example, means that the company only has enough net operating income to cover 92% of its yearly debt payments.

What is a bad interest coverage ratio?
Understand how interest coverage ratio is calculated and what it signifies, and learn what market analysts consider to be ... Read Answer >> 
What does a high times interest earned ratio signify with regard to a company's future?
Learn how the times interest earned ratio affects the perception of solvency of a company, and what a high ratio can mean ... Read Answer >>

Investing
An Introduction to Coverage Ratios
Interest coverage ratios help determine a company's ability to pay down its debt. 
Investing
Analyzing AT&T's Debt Ratios in 2016 (T)
Learn about AT&T Inc. and its key debt ratios, such as the debttoequity ratio, interest coverage ratio and cash flowtodebt ratio. 
Investing
Analyze Investments Quickly With Ratios
Make informed decisions about your investments with these easy equations. 
Investing
Analyzing Investments With Solvency Ratios
Solvency ratios are extremely useful in helping analyze a firm’s ability to meet its longterm obligations; but like most financial ratios, they must be used in the context of an overall company ... 
Investing
Analyzing IBM's Debt Ratios in 2016 (IBM)
Look over the debt ratios for the IBM Corporation, such as its debttoequity ratio, its interest coverage ratio and its cash flow to debt ratio. 
Investing
Analyzing Verizon's Debt Ratios in 2016 (VZ)
Analyze Verizon's key debt ratios, and understand how the company has been able to expand in recent years by safely increasing its debt load. 
Investing
Ratio Analysis
Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ... 
Investing
Analyzing Amgen's Debt Ratios in 2016 (AMGN)
Learn about Amgen Inc. and its key debt ratios, such as the debttoequity ratio, interest coverage ratio and cash flowtodebt ratio. 
Investing
Sysco and Other Big Movers In Services
The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ... 
Investing
4 Leverage Ratios Used In Evaluating Energy Firms
These four leverage ratios can help investors evaluate how energy manage their debt.

Interest Coverage Ratio
The interest coverage ratio is a debt ratio and profitability ... 
Coverage Ratio
A coverage ratio is a measure of a company's ability to service ... 
FixedCharge Coverage Ratio
The fixedcharge coverage ratio indicates a firm's ability to ... 
Asset Coverage Ratio
A test that determines a company's ability to cover debt obligations ... 
EBITDA To Fixed Charges
EBITDA To Fixed Charges is a ratio used to measure a company's ... 
Current Ratio
The current ratio is a liquidity ratio that measures a company's ...