Debt Service Coverage Ratio

MoneyBestPal Team
The cash flow available to meet existing debt obligations.

The cash flow available to meet existing debt obligations is shown by the Debt Service Coverage Ratio (DSCR). The ratio expresses net operating income as a multiple of debt commitments due within a year, including lease payments, sinking fund contributions, interest payments, and principal payments.

By dividing net operational profit by total debt service, the DSCR formula is computed. Net operating income is the profit before interest, taxes, depreciation, and amortization (EBITDA). Total debt service is the sum of the annual lease, sinking fund, interest, and principal payments.

Assume, for instance, that a business has a net operating income of $500,000 and a $300,000 total debt service. 500,000 / 300,000 = 1.67 is the DSCR. This indicates that the company's income exceeds its debt obligations by 1.67 times.

Lenders evaluate a borrower's capacity for loan repayment using the DSCR. A greater DSCR denotes a lesser default risk, whereas a lower DSCR denotes a larger default risk. Lenders often want a DSCR of 1.15 or above, though this can change based on the nature and conditions of the loan.