Listen to a Business English Dialogue About Fixed charge coverage
Jade: Hi Leah, have you heard about fixed charge coverage?
Leah: No, I haven’t. What does it measure?
Jade: Fixed charge coverage is a financial ratio that measures a company’s ability to cover its fixed charges, such as interest expenses and lease payments, with its operating income.
Leah: Oh, I see. So, it tells us if a company can meet its financial obligations?
Jade: Exactly! A higher fixed charge coverage ratio indicates that the company has more earnings available to cover its fixed expenses.
Leah: Are there any specific formulas to calculate fixed charge coverage?
Jade: Yes, it’s typically calculated by dividing a company’s earnings before interest and taxes (EBIT) by its total fixed charges.
Leah: Can you give me an example of a fixed charge?
Jade: Sure, fixed charges can include interest payments on loans, lease payments, and other contractual obligations that remain constant regardless of the company’s sales or revenue.
Leah: How do investors use fixed charge coverage when analyzing a company?
Jade: Investors use it to assess a company’s financial health and its ability to meet its debt obligations, as a higher fixed charge coverage ratio indicates lower financial risk.
Leah: Are there any limitations to using fixed charge coverage?
Jade: Yes, like any financial ratio, fixed charge coverage should be interpreted in the context of other factors and should not be used in isolation to evaluate a company’s financial strength.
Leah: Thanks for explaining, Jade. Fixed charge coverage seems like an important metric for assessing financial risk.
Jade: You’re welcome, Leah. It’s a key indicator that provides insight into a company’s ability to manage its fixed expenses.