HOMEPAGE

Debt Service Coverage Ratio (DSCR)

Definition

The Debt Service Coverage Ratio measures a company’s ability to cover its debt payments using operating income or operating cash flow.

$$\text{DSCR}=\frac{\text{Net Operating Income}}{\text{Total Debt Service}}$$

Where:

• Net Operating Income = operating income or operating cash flow
• Total Debt Service = interest + principal payments due

Why It Matters

• Core solvency metric used by lenders, banks, and credit analysts.
• Required in project finance, real estate, and leveraged lending.
• Indicates whether a company can meet its debt obligations without strain.

How to Interpret It

• DSCR > 1.0: Company generates enough income to cover debt payments.
• DSCR < 1.0: Insufficient income — potential default risk.
• 1.2–1.5: Common minimum threshold for lenders.
• > 2.0: Strong, conservative coverage.

Example

Net Operating Income = $300M Total Debt Service = $200M

$$\text{DSCR}=\frac{300}{200}=1.5$$

A DSCR of 1.5 means the company generates 50% more income than needed to service its debt.