Fixed Payment Coverage is a term that indicates whether the enterprise has sufficient revenue available to pay obligations to investors and creditors. The indicator is a modification of the CF interest coverage and it should be used in case the enterprise has other fixed obligations (lease payments, debt payments, payment of preferential dividends, etc.)
Fixed payment coverage = Operating CF + paid interest × (1-t) / Paid interest × (1-t) + Lease payments × (1-t) + amortization + preferential dividends
- t is the income tax rate
- amortization is annual loan repayments
The indicator belongs to indicators based on cash flow.
Use of the indicator in practice: In the enterprise it is used by CFO in financial analysis to analyze ratios. Indicators based on cash flow try to catch warning signs of potential credit problems and assess internal financial potential of the company.
Related terms and methods:
Related management field: