The fixed charge coverage ratio (FCCR) compares earnings adjusted under a particular lending definition with the fixed obligations that definition includes. It asks how much coverage a business has for each dollar of those obligations. The credit agreement controls the calculation, testing period and required minimum; paying every installment on time does not by itself establish covenant compliance.
FCCR Formula and Worked Example
There is no universal FCCR formula. This example uses EBITDA less unfunded capital expenditures, cash taxes and owner distributions, divided by scheduled debt principal and cash interest. BDC's borrowing-capacity guidance describes this general approach and notes that lenders make different adjustments, including deductions for dividends.
Example FCCR = (EBITDA − Unfunded CapEx − Cash Taxes − Owner Distributions)
÷ (Scheduled Debt Principal + Cash Interest)Assume one business, one trailing twelve-month period and amounts in US dollars. These are invented teaching inputs, not a borrower's actual compliance certificate. All six inputs cover the same period; there are no additional permitted add-backs, finance leases, balloon payments or other fixed charges in this example.
| Input | Amount (USD) | Treatment in this example | Supporting record |
|---|---|---|---|
| EBITDA, after ordinary rent expense | 300,000 | Numerator starting point | Income statement reconciled to EBITDA |
| Unfunded capital expenditures | 40,000 | Subtract from numerator | Asset purchases and financing records |
| Cash income taxes paid | 30,000 | Subtract from numerator | Tax payment records |
| Owner distributions paid | 20,000 | Subtract from numerator | Equity ledger and bank payments |
| Scheduled debt principal | 120,000 | Add to denominator | Loan amortization schedules |
| Cash interest on that debt | 30,000 | Add to denominator | Interest statements and payments |
The business also paid 60,000 USD in ordinary rent, already deducted in the 300,000 USD EBITDA. This definition leaves rent there: it neither adds rent back nor puts it in the denominator. Cash rent equals rent expense for this example. A lease-inclusive definition would require a different calculation; do not add back an expense that EBITDA already excludes or count the same lease payment twice.
| Calculation | Arithmetic | Result |
|---|---|---|
| Adjusted earnings numerator | 300,000 − 40,000 − 30,000 − 20,000 | 210,000 USD |
| Fixed-charge denominator | 120,000 + 30,000 | 150,000 USD |
| FCCR | 210,000 ÷ 150,000 | 1.40× |
| Surplus under this definition | 210,000 − 150,000 | 60,000 USD |
The 1.40× result means 1.40 USD of adjusted earnings per 1 USD of included obligations, or 40% more than that denominator. The 60,000 USD surplus is a calculation result, not the bank balance: collections, inventory purchases and other working-capital movements can still create a cash shortage.
Suppose this illustrative agreement required at least 1.25×, with no other conditions affecting the calculation. Required adjusted earnings would be 150,000 × 1.25 = 187,500 USD. Headroom would be 210,000 − 187,500 = 22,500 USD, or 0.15 ratio points. This passes that assumed ratio test only; 1.25× is not a universal covenant threshold or a promise of financing.
What if the denominator is zero? Division by zero is undefined, even when the numerator is positive; zero divided by zero is also undefined. Report the ratio as undefined and check the agreement's treatment rather than displaying zero, infinity or an automatic pass. If an input is missing, the calculation is incomplete. With a positive denominator, a negative numerator produces a negative ratio and signals a shortfall under this definition.
FCCR Versus DSCR: Read the Definitions First
Debt service coverage ratio (DSCR) commonly compares EBITDA with principal and interest. BDC's DSCR guide also notes that more than one calculation exists. The names alone do not tell you whether taxes, distributions or leases are included.
| Question | FCCR | DSCR | Agreement clauses to inspect |
|---|---|---|---|
| What is the numerator? | Often earnings adjusted for specified cash outflows; the example above subtracts capex, taxes and distributions | May use EBITDA, adjusted earnings or a defined cash-flow measure | EBITDA or cash-flow definition; permitted add-backs, deductions and caps |
| What is the denominator? | Defined fixed charges; may include debt service plus specified leases or other payments | Commonly scheduled principal and interest; the debt definition may include lease obligations | Fixed charges, debt service, indebtedness and lease definitions |
| Is rent added back? | Only if the applicable definition requires it and it was deducted in the starting earnings measure | Do not assume either an add-back or exclusion | Lease accounting adjustments and rules preventing duplicate charges |
| What period and minimum apply? | The agreement's measurement period and applicable threshold | The agreement's measurement period and applicable threshold | Testing dates, trailing periods, minimum ratios and any activation conditions |
Using unadjusted EBITDA DSCR for the same invented business gives 300,000 ÷ (120,000 + 30,000) = 2.00×, compared with the example's 1.40× FCCR. That difference comes from the 90,000 USD of specified numerator deductions. It does not establish that DSCR is always higher or that either calculation matches your lender's certificate.
Definitions can also put the same category on a different side of the fraction. A 2025 SEC-filed ABL facility disclosure describes EBITDA less unfinanced capital expenditures over fixed charges that include cash taxes and restricted payments, among other items. Our teaching example deducts taxes and distributions in the numerator instead. These approaches are not interchangeable; do not combine their adjustments into a new formula.
Reading the Number Without Inventing a Benchmark
For a positive denominator, 1.00× means the numerator exactly equals the included obligations. Below 1.00× means a shortfall under that calculation. Above 1.00× means some mathematical coverage, but does not establish enough liquidity, compliance with every covenant or eligibility for a new loan.
Actual thresholds belong to individual agreements. For example, a 2012 financing amendment for a Metalico subsidiary, section 30(b) specified a 1.10-to-1.0 minimum measured over four fiscal quarters, starting June 30, 2013, with its own defined terms and a clause tying changes to senior financing documents. That is a historical contract example, not a current lending standard. Read your signed agreement, amendments and compliance certificate together before comparing its minimum with a calculation from another source.
Why This Ratio Ends Up in Your Loan Agreement
A financial covenant can let a lender monitor deterioration before a missed payment. A breach and its consequences depend on the contract, including notice requirements, grace periods, cure rights and any written waiver. BDC's explanation of loan covenants describes both financial restrictions and potential consequences such as corrective discussions or a loan being called.
Before submitting a certificate, check whether the covenant is tested every quarter or only after a specified trigger, whether the calculation uses consolidated entities, and what happens if it fails. If your forecast approaches the contracted minimum, discuss it with the lender early; do not assume on-time payments waive a separate covenant breach.
What Actually Moves Your FCCR
Improve the numerator under your definition. Better operating margins increase EBITDA. In the worked example, unfunded capex and owner distributions reduce coverage. An extra 10,000 USD distribution, with everything else unchanged, would reduce the numerator to 200,000 USD and FCCR to about 1.33×. Do not omit necessary spending from forecasts to make the ratio look stronger.
Model new obligations before signing. In the example, an additional 20,000 USD of scheduled principal, with earnings and other inputs unchanged, raises the denominator to 170,000 USD and reduces FCCR to about 1.24×. That would fail the assumed 1.25× test. A real borrowing decision may also change interest, earnings and covenant permissions; include those effects in the full forecast.
Lease changes need particular care. Under this example's definition, higher ordinary rent lowers EBITDA. Under a lease-inclusive formula, rent may instead be added back and counted as a fixed charge. Follow one consistent agreement definition throughout.
Keeping the Inputs Clean
Keep the signed definition beside a reconciliation from the ledger to every input. Save the period-end income statement, EBITDA adjustments, debt schedules, lease records, cash tax payments, distributions and financed-versus-unfunded asset purchases. Preserve the calculation and its supporting records for each testing date so later corrections are traceable.
A plain-text ledger in Beancount.io can help organize and trace those transactions. The ledger supplies the evidence; the credit agreement and its permitted adjustments determine the covenant calculation.
Primary sources checked September 10, 2026. The historical filings illustrate differences between contracts; they are not representations of current loan offers.
