Definition – What is DSCR (Debt Service Coverage Ratio)?
DSCR is a measurement of cash flow available to settle interest costs.
Formula – How to calculate DSCR
DSCR = Net Operating Income / Debt Service
Net Operating Income = Net Income + Depreciation + Interest Expense + Other Non-cash Items
Debt Service = Principal Repayment + Interest Payments + Lease Payments
A business has net income of $2,500, depreciation of $3,000, interest expense of $3,000, non-cash items of $1,250, principal repayment of $500, interest payments of $1,250, and lease payments of $750.
Net Operating Income = $2,500 + $3,000 + $3,000 + $1,250 = $9,750
Debt Service = $500 + $1,250 + $750 = $2,500
DSCR = $9.750 / $2,500 = 3.900
Therefore, this business has a DSCR of 3.900.
Sources and more resources
- SageWorks – 3 ways to calculate the DSCR – Three different methods for calculating debt service coverage ratio.
- Finance Formulas – Debt Coverage Ratio – The debt coverage ratio formula.
- Accounting Tools – Debt service coverage ratio – An explanation of the formula for debt service.
- Wall Street Mojo – DSCR Ratio – Debt Service Coverage Ratio – A longer explanation of the debt service coverage ratio.
- Investopedia – Debt-Service Coverage Ratio (DSCR) – Another formula and explanation for DSCR.
- Wikipedia – Debt service coverage ratio – Wikipedia’s entry on the debt service coverage ratio.