What is Debt Service Coverage Ratio (DSCR)?
DSCR is a measure of a company's cash flow and its ability to pay its debts. It helps investors assess the financial health of a firm. A higher ratio indicates a greater likelihood of a company obtaining a loan.
The DSCR compares a company's net operating income to its total debt service, which includes principal and interest payments. Net operating income is income available after deducting operating expenses. The total debt service is the sum of current debt obligations. The higher the DSCR, the more cash flow a company has to cover its debt.
Lenders and investors use the DSCR to evaluate financial health and creditworthiness. Companies can also use it to monitor debt levels and plan capital structure. A DSCR of 1 means a company can just cover its debt service, while a DSCR below 1 indicates the company cannot meet its debt obligations. High DSCR indicates excess income for debt service and investment in other projects.
How to Calculate DSCR
DSCR can be calculated using the following formula: DSCR = Net operating income / Total debt service
Net operating income = Total revenue - All Operating expenses
Total debt service = Current debt obligations