Fee-Based Coverage Ratio Calculation and Analysis
In the realm of corporate finance, the ability to meet fixed financial obligations is a crucial factor that influences a company's creditworthiness. One key metric used to assess this capacity is the Fixed Charge Coverage Ratio (FCCR). This ratio measures a company's ability to cover all fixed financial obligations, including interest, lease payments, and principal repayments, beyond just interest expenses.
A company with a high FCCR indicates that its earnings sufficiently cover mandatory fixed costs, reducing the risk of financial distress. This was evident in the case of Nike Inc., a global leader in the sportswear industry. Nike demonstrated a high FCCR, ranging from approximately 5.01 in 2020, peaking at 8.53 in 2021, and staying relatively stable near 8.1 to 8.5 through 2024 before declining back to 5.05 in 2025. This strong ability to cover fixed charges like interest and lease payments during most of this period reflected robust earnings and financial strength. However, the recent decline suggests increased risk or weakened capacity to meet fixed financial obligations amid declining earnings before fixed charges and tax.
On the other hand, Orion Properties Inc., a real estate company, showed lower FCCRs of around 2.27x to 3.11x between quarters in 2025. While these ratios are lower than Nike's peak, they still reflect a solid ability to cover fixed charges considering the capital-intensive real estate sector. A ratio above 2 generally suggests adequate coverage, although far lower than the very high coverage observed at Nike.
The FCCR is an essential tool for creditors, such as banks and bondholders, to evaluate a company's creditworthiness. A higher ratio is preferred, as it indicates a company's earnings are sufficient to cover mandatory fixed costs, reducing financial distress risk. Companies with relatively high Earnings Before Interest and Tax (EBIT) have a relatively good ability to pay fixed costs.
To calculate the FCCR, start with EBIT, add the lease expense, and use the result as the numerator. The denominator is interest expense plus lease expense. Interest expense and lease expense can be found in the income statement or the notes to the financial statements. If not, EBIT can be calculated manually.
While some real estate investment trusts (REITs) may have lower FCCRs, they often emphasize this ratio to demonstrate liquidity and financing ability. However, tightening FCCRs (i.e., declining ratios) would signal less effective property or operational management and could put credit ratings under pressure, as illustrated by Fitch Ratings for Ceconomy AG (a different company). This financial risk associated with low or declining FCCRs requires scrutiny by investors and credit agencies.
In summary, a high FCCR indicates financial strength and lower risk for companies, while a low or declining ratio implies greater financial vulnerability. Investors and creditors should pay close attention to this ratio when evaluating a company's financial health and creditworthiness.
- Investors and creditors should be aware that a high Fixed Charge Coverage Ratio (FCCR) indicates a company's financial strength and lower risk, which can be beneficial for evaluating a company's financial health and creditworthiness.
- On the other hand, a low or declining FCCR suggests increased financial vulnerability, requiring closer scrutiny by investors and credit agencies due to the associated financial risk.
