If the company you are evaluating spends heavily on leases, such as leases on buildings and equipment, then the Fixed Charge Coverage calculation is especially important. If you look closely at this calculation of Fixed Charge Coverage, you will notice that the lower the
Operating Profit, the more amplified the negative affects of the
Lease Payments will become. This somewhat reflects reality, as a company with declining Operating Profits will more readily feel the continual burden of Lease Payments combined with the Interest Expense.
