Debt Service Coverage Ratio Formula & Example

Definition: Debt service coverage ratio (DSCR) indicates the amount of cash flow available for debt servicing to interest, principal and lease payments. It is also known as "debt coverage ratio".

Formula:
DSCR = Net Operating Income / Total Debt Service
Or: = EBIT / (interest expense + before-tax principle repayment)
Or: = EBIT / (interest + (principal/ 1-tax rate)

Example 1:
An investment property has a net operating income of $45,000 and an annual debt service of $50,000. Then, the DSCR = 45,000 / 50,000 = 0.9

Example 2:
JKL Ltd. has the following data:
Net Income = $60,000 Interest Expense = $300,000 Taxes = $25,000 Principal Payments = $22,000 Tax Rate = 30%
Then,
EBIT = 60,000 + 300,000 + 25,000 = $385,000
DSCR = EBIT / [interest + (principal / (1-tax rate))] = 385,000 / [300,000 + (22,000 / (1 - 0.3))] = 385,000 / 1.16
Interpretation: The ratio of 1.16 is more than 1 which indicates that the company is generating sufficient cash flow to pay their debts.

* Next: Interest Coverage Ratio Example
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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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