What is the Difference Between Fixed Charge Coverage Ratio and Debt Service Coverage Ratio?

The Fixed Charge Coverage Ratio (FCCR) and Debt Service Coverage Ratio (DSCR) are both financial metrics used to assess a company's ability to cover its financial obligations, but they differ in their focus and calculation.

Fixed Charge Coverage Ratio (FCCR):

• Measures a company's ability to cover its fixed charges, such as debt payments, interest expense, and equipment lease expense.
• Shows how well a company's earnings can cover its fixed expenses.
• Formula: FCCR = (EBIT + Lease Payments) / (Interest Expense + Lease Payments).
• A high FCCR indicates that a company can adequately cover its fixed charges based on its earnings.

Debt Service Coverage Ratio (DSCR):

• Measures the rate at which a company's cash flow can cover its debt obligations.
• Focuses on the company's ability to generate enough operating profit to service its debt.
• Formula: DSCR = (Net Operating Income) / (Debt Obligations).
• A higher DSCR indicates that the company has more cash flow available to cover its debt payments.

In summary, the FCCR focuses on a company's ability to cover its fixed charges, while the DSCR measures the company's ability to generate enough cash flow to cover its debt obligations. Both ratios are used by lenders and investors to assess a company's creditworthiness and financial health, but they serve different purposes and are calculated differently.

Comparative Table: Fixed Charge Coverage Ratio vs Debt Service Coverage Ratio

The Fixed Charge Coverage Ratio (FCCR) and Debt Service Coverage Ratio (DSCR) are both financial metrics used to assess a company's ability to cover its fixed charges and debt obligations, respectively. Here is a table highlighting the differences between the two:

Both ratios are used to evaluate a company's financial health and ability to meet its financial obligations. However, the FCCR focuses on covering fixed charges, while the DSCR specifically addresses debt service obligations.