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The Daily Technical #138: What levers have a positive/negative impact on the IRR of an investment?

How to answer "How do you calculate the fixed charge coverage ratio (FCCR) and what does it mean?"

March 21, 2025

Good morning. Welcome to the 138th edition of The Daily Technical.

Now, you’re here for one reason, so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
How do you calculate the fixed charge coverage ratio (FCCR) and what does it mean?

To calculate the Fixed Charge Coverage Ratio (FCCR), first understand its purpose: evaluating a company’s ability to cover fixed expenses like rent, utilities, and interest.

A higher FCCR indicates stronger creditworthiness.

Formula: FCCR = (EBIT + Lease Charges) / (Lease Charges + Interest Expense).

Begin by determining Earnings Before Interest and Taxes (EBIT), then add lease charges.

Divide this sum by the combined total of lease charges and interest expenses.

This ratio provides insight into the company's financial endurance and stability.

Common Mistakes

  1. Mixing up what counts as a fixed charge, confusing them with variable costs like wages and materials. Stick to fixed charges like rent, lease, and interest expenses to maintain calculation accuracy.

  2. Overlooking EBIT's importance and including non-earnings figures when calculating. Keep EBIT focused on a company’s core earnings and exclude one-time or non-operational items for precise results.

  3. Assuming that a high FCCR always means financial health. It's crucial to analyze in context, considering industry norms and other financial metrics to get the complete picture.

TL;DR

  • Calculate FCCR using: (EBIT + Lease Charges) / (Lease Charges + Interest Expense).

  • Higher FCCR = stronger creditworthiness, financial stability.

  • Demonstrates ability to meet fixed expenses.

TODAY’S QUESTION
What levers have a positive/negative impact on the IRR of an investment?

Type your answer here. Within 60 seconds you’ll have custom feedback in your inbox.

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