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
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.