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Definition – What is the Debt Coverage Ratio?
The debt coverage ratio is the ratio of operating income to debt service.
It is a metric that is used to evaluate how well a company can pay debt.
A debt coverage ratio of ‘1’ means that operating income is just covering debt service.
A debt coverage ratio of more than one means that there is more operating income than debt service costs.
A debt coverage ratio of less than one means that debt service costs exceed operating income.
Formula – How to calculate Debt Coverage Ratio
Debt Coverage Ratio = Operating Income / Debt Service
Example
A company has net operating income of $3,000 and debt service of $1,500.
Debt Coverage Ratio = $3,000 / $1,500 = 2
Therefore, this company’s debt coverage ratio is 2.
Sources and more resources
- Investopedia – Debt-Service Coverage Ratio – An explanation of what the debt coverage ratio is and how to calculate it.
- Finance Formulas – Debt Coverage Ratio – The formula for debt coverage ratio.
- Wikipedia – Debt service coverage ratio – A long explanation of DSCR.