What is Debt Service Coverage Ratio (DSCR), and how is it calculated?

Question

Accepted Answer

Debt Service Coverage Ratio (DSCR) measures a company's ability to cover its debt obligations with its operating income.

Definition: DSCR is a financial ratio that indicates how easily a company can pay its debt obligations with its net operating income.
Calculation: DSCR = Net Operating Income / Total Debt Service. For example, if a company has $200,000 in net operating income and $150,000 in debt service, DSCR = 200,000 / 150,000 = 1.33.
Interpretation: A DSCR greater than 1 indicates that the company generates enough income to cover its debt obligations, while a ratio less than 1 suggests potential financial trouble.
Importance: Lenders often use DSCR to assess the risk of lending to a business; a higher DSCR indicates lower risk.
Industry Standards: Different industries have varying acceptable DSCR levels; for instance, real estate often looks for a DSCR of 1.25 or higher.

Accepted Answer

Calculation: DSCR = Net Operating Income / Total Debt Service. For example, if a company has $200,000 in net operating income and $150,000 in debt service, DSCR = 200,000 / 150,000 = 1.33.

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What is Debt Service Coverage Ratio (DSCR), and how is it calculated?

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