Answers the Question
Can our money coming in cover our debt payments?
Calculator for Debt Service Coverage Ratio
What Is the Debt Service Coverage Ratio?
The formula is used for understanding how easily a firm can cover its debt costs solely with money coming in from operations.
Why Is it Important?
- The higher the cash flow relative to interest, principle, and lease payments, the less at risk a company appears. A company with a healthy DSCR will be able to raise additional funds and take on additional loans at more favorable terms, because it will appear to be healthier and less subject to risk.
Formula(s) to Calculate Debt Service Coverage Ratio
- NET OPERATING INCOME / (PRINCIPAL REPAYMENT + INTEREST PAYMENT + LEASE PAYMENT)
- Assuming that the DSCRs in different marketplaces are directly comparable. Some firms with relatively low DSCRs may be in very stable and predictable markets, while those with high DSCRs may be subject to substantial marketplace risks.
- Not considering the terms of debt instruments and penalties for default.
- Not considering money that has been banked and can be used for debt repayment.