1. What is the Debt Service Coverage Ratio?

The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a company's ability to service its debt obligations with its operating income. It indicates how many times the company's operating income can cover its debt payments.

2. How Does the Calculator Work?

The calculator uses the DSCR formula:

Where:

• Net Operating Income — Company's operating income after operating expenses
• Total Debt Service — Total debt payments including principal and interest

Explanation: A DSCR greater than 1 indicates sufficient income to cover debt payments, while a ratio below 1 suggests potential difficulty in meeting debt obligations.

3. Importance of DSCR Calculation

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 of businesses.

4. Using the Calculator

Tips: Enter Net Operating Income and Total Debt Service in dollars. Both values must be positive numbers greater than zero for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good DSCR ratio?
A: Typically, lenders prefer a DSCR of 1.25 or higher, indicating sufficient cash flow to cover debt payments with a safety margin.

Q2: Can DSCR be less than 1?
A: Yes, a DSCR below 1 indicates that the company's operating income is insufficient to cover its debt obligations, which may signal financial distress.

Q3: How often should DSCR be calculated?
A: DSCR should be calculated regularly, typically quarterly or annually, to monitor financial health and debt servicing capability.

Q4: Does DSCR include all types of debt?
A: Yes, Total Debt Service includes all principal and interest payments on all outstanding debt obligations.

Q5: How does DSCR differ from debt-to-income ratio?
A: DSCR focuses on business income and debt service, while debt-to-income ratio typically refers to personal finance and compares individual debt payments to gross income.