"An early warning sign to help spot struggling UK retailers"

I spotted the headline in City AM and thought, oh dear, this will just be some puff piece about getting the right product mix, and glosses over the fact that landlords aren't dropping the rent fast enough, but no, she nails it:

The metric we use to assess this aspect of a retail business is called ‘fixed charge cover’.

If you felt moved to calculate this yourself, it is a company’s ‘EBITDAR’ (earnings before interest, depreciation, amortisation and rent) divided by total debt service costs (net interest and rental expenses).

At its heart, however, this ratio illustrates the ability of a business to service its debt and rental obligations. Our rule of thumb is that when a fixed charge cover [drops to] 2x or 2.5x, serious alarms bells start to ring.

Take a look at the following chart, which ranks a dozen of the UK’s household-name retailers by their fixed charge cover and also shows the total returns on their share prices over the last six and 12 months.

As you can see, there is a huge correlation here. All the companies with a fixed charge cover of less than two times have seen their share price fall by a half or more over the last 12 (and the last six) months.