1. What is Debt Service Coverage Ratio?

The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a company's ability to service its debt with its net operating income. It's commonly used by lenders to assess the creditworthiness of borrowers.

2. How Does the Calculator Work?

The calculator uses the DSCR formula:

Where:

• Net Operating Income — Company's income after operating expenses
• Total Debt Service — Total of all debt obligations (principal + interest)

Interpretation: A DSCR of 1 means the company has exactly enough income to pay its debt. Above 1 indicates extra capacity, while below 1 indicates insufficient income.

3. Importance of DSCR Calculation

Details: Lenders typically require a minimum DSCR (often 1.2-1.5) to approve loans. It's crucial for assessing financial health and loan eligibility.

4. Using the Calculator

Tips: Enter net operating income and total debt service in dollars. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good DSCR ratio?
A: Generally, 1.25 or higher is considered good. Lenders may have specific requirements depending on the industry and risk assessment.

Q2: Can DSCR be less than 1?
A: Yes, but it indicates the company doesn't generate enough income to cover its debt payments, which is a red flag for lenders.

Q3: How is DSCR different from interest coverage ratio?
A: DSCR considers both principal and interest payments, while interest coverage ratio only looks at interest payments.

Q4: Should DSCR be calculated annually or monthly?
A: Typically annual, but can be calculated for any period as long as both income and debt service are for the same period.

Q5: What industries use DSCR most?
A: Commercial real estate, corporate lending, and project finance rely heavily on DSCR for loan underwriting.