Listen to a Business English Dialogue about Fixed charge coverage
Jordan: Hey Abigail, have you ever heard of fixed charge coverage?
Abigail: No, I haven’t. What is it about?
Jordan: Fixed charge coverage is a financial ratio used to measure a company’s ability to cover its fixed charges, such as interest expenses and lease payments, with its operating income.
Abigail: Oh, I see. How is it calculated?
Jordan: It’s calculated by dividing a company’s earnings before interest and taxes (EBIT) by its total fixed charges. A higher fixed charge coverage ratio indicates that a company is better able to meet its fixed obligations.
Abigail: That makes sense. Is there a specific threshold that indicates a healthy fixed charge coverage ratio?
Jordan: Generally, a fixed charge coverage ratio above 1.5 is considered healthy, indicating that the company’s earnings are sufficient to cover its fixed charges.
Abigail: Got it. So, what are some factors that could affect a company’s fixed charge coverage ratio?
Jordan: Factors like changes in interest rates, increases in lease expenses, or declines in operating income can all impact a company’s fixed charge coverage ratio.
Abigail: Thanks for explaining, Jordan. I’ll keep that in mind when analyzing financial statements.
Jordan: You’re welcome, Abigail. Understanding fixed charge coverage can provide valuable insights into a company’s financial health. Let me know if you have any other questions.