Fixed Charges Coverage Ratio shows how many times the cash flow before interest and taxes covers all fixed financing charges. This ratio measures debt servicing ability comprehensively because it considers both the interest and the principal repayment obligations. Tesco’s ratios for 2005 show 50.51, 2006 shows 50.92, 2007 shows 58.60, 2008 shows 50.51 and 2009 shows 83.07.
This growing trend shows the company is increasing its cash flow to back all financing charges which is extremely good for a company since it shows they have all financing under cover and investors can safely invest since the strong a company’s fixed charges coverage ratio the better the financial performance and dividend of course so this way Tesco is an attractive investment. The ratio may be amplified to include other fixed charges like lease payment and preference dividends. The fixed charge coverage ratio has to be interpreted with care because short-term loan funds like working capital loans and commercial paper tend to be self-renewing in nature and hence do not have to be ordinarily repaid from cash flows generated by operations. Hence, a fixed charge coverage ratio of less than 1 need not be viewed with such concern. Financial institutions calculate the average.
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