Glossary - Debt Service Coverage Ratio (DSCR)
The Debt Service Coverage Ratio (DSCR) is a financial ratio that measures a company's ability to service its current debt obligations with its operating income. It is calculated by dividing the company’s net operating income by its total debt service obligations (principal and interest payments). A DSCR greater than 1 indicates the company has sufficient income to cover its debt payments, while a DSCR less than 1 suggests it does not.
Also known as
- Debt Coverage Ratio
- Debt Service Ratio
- Interest Coverage Ratio
Use cases examples
- Loan Agreement: The Borrower shall maintain a minimum Debt Service Coverage Ratio (DSCR) of 1.25 times as tested on an annual basis.
- Financial Covenants Schedule: Compliance with the required DSCR of not less than 1.5x shall be demonstrated within the quarterly financial statements submitted to the lender.
Considerations for investors
- Evaluating the DSCR as a key indicator of financial health and risk associated with the company, impacting investment decisions.
- Monitoring the DSCR over time as an important metric in assessing the company's ability to generate enough cash flow to cover debt obligations, which can affect returns on investment.
Considerations for founders
- Ensuring the company’s operating income is stable and sufficient to meet existing and foreseeable debt obligations to maintain a healthy DSCR.
- Understanding that a low DSCR may limit the company's ability to obtain additional financing and increase the cost of borrowing.
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