Fixed charge coverage ratio

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fixed charge coverage ratio

Posted by: alvaro Aug 17 2004, 02:27 PM
Hello, I have to analyse a commercial lease using the fixed charge coverage ratio. I was told the formula that I have to use is (EBTDAR - Cash Taxes - Cash Divindes- Maintenance Capex)/ (CPLTD+ Interest Expense+ Rent Expense +Proposed Debt Service).
I have the lease scenario as 25millions dollars, with 10 percent residual, priced at cost of funds +250 bps.

I do not know what Maintanance Capex means and also what would be the proposed debt service.

Thank you.

Posted by: loanuniverse Aug 17 2004, 06:53 PM
Alvaro:

I am going to completely guess when giving you this feedback. The truth is that some of those terms that you mentioned are not known to me.

For example I know that

E = earnings
B = before
T = Taxes
D = Depreciation
A = Amortization
R = What does R means?

Now to your questions ” I do not know what Maintanance Capex means and also what would be the proposed debt service.”

Starting from the understanding that Capex is shorthand for Capital Expenditure, one would think that the maintenance Capex would be the amount of capital investment that a company needs to do every period to support a certain level of sales. That is, a company might need to invest a million dollars in equipment every year just to replace the used up equipment and be able to maintain its level of revenues.

Now your “proposed debt service” is harder to figure out. I would have to ask, what kind of debt is the company going to need? Are you analyzing this for a particular loan request.

Sorry I could not be of more help.

Edit:

R = Rent

Fixed Charge Coverage Formula is:

(EBIT + fixed charge) / (total interest + fixed charge)

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