What is Debt Service Coverage Ratio?
Debt Service Cover Ratio (DSCR) is a measurement of the net operating Income available to cover debt service (principal and interest) in a given operating period. Debt Service Coverage Ratio (DSCR) is useful for analysing financial statements and estimating cash flow for a business or investment property. DSCR expresses the net operating income divided by the total debt service for a particular property.
In the context of business finance, the debt service coverage ratio (DSCR) is a measurement of a firm’s available cash flow to pay current debt responsibilities. The DSCR shows investors whether a company has enough income to pay its debts. In the context of government finance, the DSCR is the amount of export earnings needed by a country to meet annual interest and principal payments on its external debt. In the context of individual finance, it is a ratio used by bank loan officers to determine income property loans.
DSCR is used to analyze firms, projects, or individual borrowers. The minimum DSCR that a lender demands depends on macroeconomic conditions. The debt service coverage ratio formula depends on whether a loan is for a property or a business. While the logic behind the DSCR formula is the same for both, there is a difference in how it is calculated.
