Fixed charge cover ratio

Definition

The fixed charge cover ratio compares earnings available to meet fixed commitments against those commitments — interest, lease payments and similar unavoidable charges. It is a broader cousin of interest cover, capturing more than just loan interest.

Why it matters

Lenders and some loan covenants use it to check a company is not over-committed on fixed outgoings. A higher ratio means more cushion. See DSCR and calculating interest cover.

In practice

For a UK limited company, fixed charge cover is really a question of sequencing. Interest, lease and any other unavoidable payments fall due on their own schedule regardless of how trading is going that month, so the ratio effectively asks whether ordinary earnings comfortably clear that first layer of commitments before anything discretionary — reinvestment, dividends, discretionary hiring — gets a look in.

A company that has recently taken on a new lease alongside existing borrowing will usually see this ratio move even if underlying trading is stable, simply because the fixed-commitment base has widened. Directors reviewing management accounts often find it useful to track the ratio across a run of periods rather than a single snapshot, since one soft period read in isolation can look more alarming than the underlying trend warrants.

How lenders read it

Where a lender or a facility covenant references fixed charge cover, it is typically being used as a broader companion to interest cover — capturing lease obligations and other recurring commitments that a narrower interest-only measure would miss. A company with several lease or finance arrangements running alongside its borrowing will often be assessed on this wider basis precisely because interest cover alone would understate its true fixed outgoings.

Seen alongside DSCR, fixed charge cover forms part of a small family of coverage measures lenders draw on to build a rounded view of resilience, rather than relying on any single ratio in isolation. Consistent, comfortable cover across these related measures tends to read more favourably than strength in one and weakness in another.