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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