DSCR Formula:
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The Debt Service Coverage Ratio (DSCR) is a financial ratio that measures a company's ability to service its debt with its net operating income. It compares a company's net operating income to its total debt service obligations.
The calculator uses the DSCR formula:
Where:
Explanation: A DSCR of 1 means the company has exactly enough income to pay its debt obligations. Higher than 1 indicates the company can cover its debts, while lower than 1 suggests insufficient income.
Details: Lenders use DSCR to assess a borrower's ability to repay loans. It's crucial for loan approvals, determining loan terms, and evaluating financial health.
Tips: Enter net operating income and total debt service in USD. Both values must be positive numbers.
Q1: What is a good DSCR ratio?
A: Typically, lenders look for DSCR of 1.25 or higher. A ratio below 1 indicates negative cash flow.
Q2: How is DSCR different from debt-to-income ratio?
A: DSCR focuses on business cash flow relative to debt payments, while debt-to-income compares personal debt payments to gross income.
Q3: Can DSCR be negative?
A: No, since both NOI and debt service are positive values, DSCR cannot be negative. A value between 0 and 1 indicates financial distress.
Q4: What time period should be used for calculation?
A: Typically annual, but can be calculated for any period as long as both NOI and debt service cover the same period.
Q5: How can a company improve its DSCR?
A: By increasing revenues, reducing operating expenses, refinancing debt to lower payments, or extending loan terms.