Fixed Charge Coverage Ratio (Banking & Finance Glossary)

Summary

The ratio of EBITDA (or Adjusted EBITDA) for one period (usually quarterly or annually) to Fixed Charges of that same period. As it is used to indicate a Borrower’s ability to satisfy fixed financing expenses, Lenders generally require that the Borrower maintain this ratio above a certain threshold on a pro forma basis. For example, if the requirement was to maintain a ratio of 2.00:1.00, the Borrower would be allowed to incur additional debt, assuming that the Borrower would still have at least $2 of cash flow (or EBITDA) on a trailing 12-month basis for each $1 of interest expense. This is a more conservative measure of the Interest Coverage Ratio.