Home > Glossary > Debt service coverage ratio dscr

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a company’s ability to meet its debt obligations based on its operating income. It is calculated by dividing a company’s net operating income by its total debt service (interest and principal payments). A DSCR of 1 or higher indicates that the company generates enough income to cover its debt payments, while a ratio below 1 suggests it may struggle to meet its obligations.

Example

A company with net operating income of $500,000 and annual debt payments of $400,000 has a DSCR of 1.25, meaning it generates 25% more income than needed to cover its debt obligations.

Key points

• DSCR measures a company’s ability to cover debt payments from its operating income.

• A DSCR of 1 or higher is generally considered healthy, indicating sufficient income to meet debt obligations.

• A DSCR below 1 suggests potential financial difficulties in covering debt payments.

Quick Answers to Curious Questions

A DSCR of 1.2 or higher is generally considered strong, as it indicates that a company is generating more income than required to cover its debt payments.

It is calculated by dividing net operating income by total debt service (the sum of principal and interest payments).

A DSCR below 1 means the company is not generating enough income to cover its debt payments, signaling potential financial trouble.