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.
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