Business Glossary

ratio of profits before payment of interest and income taxes to interest on bonds and other contractual long-term debt. It indicates how many times interest charges have been earned by the corporation on a pretax basis. Since failure to meet interest payments would be a default under the terms of indenture agreements, the coverage ratio measures a margin of safety. The amount of safety desirable depends on the stability of a company's earnings. (Too much safety can be an indication of an undesirable lack of leverage.) In cyclical companies, the fixed-charge coverage in periods of recession is a telling ratio. Analysts also find it useful to calculate the number of times that a company's cash flow-i.e.,after tax earnings plus noncash expenses (for example, depreciation)-covers fixed charges. Also known as times fixed charges.

ratio of profits before payment of interest and income taxes to interest on bonds and other contractual long-term debt. It indicates how many times interest charges have been earned by the corporation on a pretax basis.