The debt service coverage ratio is a financial ratio that measures a firm’s capability to support its existing debts by assessing its net operating income using its entire debt service duties. To put it differently, this ratio compares a business’s available money with its present interest, principle, and sinking fund obligations.
The debt service coverage ratio is valuable to both investors and creditors, but lenders most often examine it. Because this ratio measures a company’s capability to create its present debt obligations, present and prospective creditors are especially interest within it.
Creditors not just wish to be aware of the cash position and cash flow of a business, they also wish to understand how much money it now owes along with the available money to cover the present and prospective debt.
Unlike the debt percentage, the debt service coverage ratio takes into consideration all of expenses associated with debt such as interest cost and other duties such as retirement and sinking fund liability. This manner, the DSCR is much more telling of a firm’s capacity to cover its debt compared to the debt ratio.
The debt service coverage ratio formula is calculated by dividing net operating income by total debt services.
Here is Burton’s debt service coverage calculation: