Question

What advantage does the fixed charge coverage ratio offer over simply using times interest earned?

Short answer

The fixed charges coverage ratio is computed to measure the company’s ability to meet all the fixed financial liabilities rather than just interest expenses.

Step-by-step solution

Step: Fixed-charge coverage ratio 

It is considered as a debt utilization ratio. It can be computed as follows:

$FixedchangecoverageRatio=\frac{Incomebeforefixedchangesandtaxes}{Fixedchanges}$

It is computed to know about the creditworthiness of the company. It shows the ability of the company to repay its debt with the available funds.

Step: Interest earned ratio 

$Timesinterestearnedratio=\frac{IncomebeforeInterest,Depriciation,taxes}{Interestexpnses}$

It is computed to know the company’s ability to meet the debt liability on the basis of the current income. Hence, it is advantageous to use a fixed charge coverage ratio as it shows the company’s ability to meet not only the interest expenses but other fixed charges also.