What Does Debt Service Coverage Ratio (DSCR) Mean?
Debt service coverage ratio (DSCR), or debt coverage ratio, is the amount of cash available to service debt in the form of interest, principal and sinking fund payments. It is used to determine if a firm has enough cash to cover its debt. The ratio is calculated as total net operating income divided by total debt serviced.
Divestopedia Explains Debt Service Coverage Ratio (DSCR)
Debt service coverage ratio is typically used by banks to determine if a firm may qualify for an income property loan. An ideal ratio is anything over 1 because that means you have at least an equal amount of cash to debt. Anything below 1 is not ideal because that means you do not have enough cash to pay your debt, also known as negative cash flow. A lender is unlikely to lend to a firm if their debt service coverage ratio is below 1, unless they have significant outside income. The debt service coverage ratio is relevant in corporate finance to determine the amount of cash flow necessary to meet annual interest payments, as well as principal payments on the debt, including sinking fund payments.
DSCR = Net Operating Income / Total Debt Serviced
Net Operating Income = Net Income + Amortization and Depreciation + Interest Expense + Other Non-cash Items
Total Debt Serviced = Principal Repayment + Interest Payments + Lease Payments