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

What is a good DSCR?

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.