Financial modelling terms explained

Debt Service Coverage Ratio (DSCR)

The debt service coverage ratio (DSCR) is the ratio of a company's operating income to its debt service payments, and it is designed to measure a company's ability to use cash flow to make debt payments

What Is Debt Service Coverage Ratio?

Debt service coverage ratio (DSCR) is the proportion of cash flow available to service debt. It is calculated as earnings before interest, taxes, depreciation and amortization (EBITDA) divided by total debt service. A high DSCR indicates that a company can easily meet its debt obligations.

A low DSCR could indicate that a company is struggling to meet its debt obligations and may be at risk of defaulting. It is important to note that a high DSCR does not necessarily mean that a company is in good financial health, as it could be relying on risky debt financing.

How Do You Calculate Debt Service Coverage Ratio?

The debt service coverage ratio (DSCR) is a financial ratio that measures a company's ability to pay its debt obligations. The debt service coverage ratio is calculated by dividing a company's operating income by its debt service obligations.

A debt service coverage ratio of 1.0 means that a company's operating income is equal to its debt service obligations. A debt service coverage ratio of less than 1.0 means that a company's operating income is not enough to cover its debt service obligations.

The debt service coverage ratio is used by lenders to assess a company's ability to repay its debt. A debt service coverage ratio of 1.0 or greater is generally considered to be a healthy ratio, while a debt service coverage ratio of less than 1.0 is a sign that a company may be in financial trouble.

What Does Debt Service Coverage Ratio Tell You?

The debt service coverage ratio (DSCR) is a key metric used to measure a company's ability to repay its debt. The ratio is calculated by dividing a company's operating income (or EBITDA) by its total debt service payments. The higher the ratio, the more easily a company can repay its debt.

The DSCR can be used to compare a company's ability to repay its debt with that of its peers. It can also be used to identify companies that may be at risk of defaulting on their debt.

What Is the Difference Between Debt Service Coverage Ratio and Cash Flow Coverage Ratio?

Debt service coverage ratio (DSCR) is a measure of a company's ability to cover its debt payments. It is calculated as earnings before interest, taxes, depreciation and amortization (EBITDA) divided by debt service payments.

Cash flow coverage ratio (CFCR) is a measure of a company's ability to cover its cash flow obligations. It is calculated as cash flow from operations divided by cash flow obligations.

The main difference between DSCR and CFCR is that DSCR includes interest payments in the denominator, while CFCR does not. CFCR is a more conservative measure, since it does not include debt payments in the calculation.

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