What is the Debt Service Coverage Ratio (DSCR)?
The Debt Service Coverage Ratio (DSCR) is a financial metric used to assess an individual’s, company's, or government’s ability to repay debt obligations. It measures whether an entity generates enough income to cover its principal and interest payments.
A higher DSCR indicates strong financial health, making it easier to obtain loans, while a low DSCR suggests financial strain and a possible risk of default.
How to Calculate DSCR?
Formula for Businesses:
Net Operating Income
DSCR = 一一一一一一一一一一
Annual Debt Payments
OR
EBITDA
DSCR = 一一一一一一一一一
Interest + Principal
OR
EBITDA - CapEx
DSCR = 一一一一一一一一一
Interest + Principal
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization.
- CapEx: Capital Expenditures (subtracted to show available cash flow for debt repayment).
Interpreting DSCR
- DSCR > 1 → Sufficient income to cover debt payments (favourable for loans).
- DSCR < 1 → Insufficient income; higher risk of default.
- DSCR = 1 → Just enough income to cover debt, but no extra cushion.
Importance of DSCR in Finance
- Used by lenders to evaluate loan eligibility.
- It helps businesses measure financial stability.
- Assists investors in assessing company risk before investing.
- It is more comprehensive than Interest Coverage Ratio (ICR), which includes total debt service rather than interest payments.
Key Takeaways
- A higher DSCR improves the chances of getting a loan approval.
- It includes existing and new debt obligations.
- Market conditions & credit history also affect loan decisions.
- Depending on financial history, some banks may approve loans even if DSCR = 1.
