fixed-charge coverage ratio investment & finance definition

A ratio calculated by dividing profits before payment of interest and income taxes by interest paid on bonds and other long-term debt. The larger the ratio, the safer the company is because it has more of a cushion to pay its debts and avoid default. The ratio illustrates how many times interest charges have been earned by the corporation on a pretax basis. If the ratio is five, the company has earned five times its interest charges, for example.