Debt-Service Coverage Ratio (DSCR)

Debt-Service Coverage Ratio (DSCR)

The Debt-Service Coverage Ratio (DSCR) is a financial ratio used to measure a company’s ability to service its debt obligations. It is calculated by dividing the Net Operating Income (NOI) by the total debt service (TDS), which includes principal and interest payments. A DSCR greater than 1 indicates that the entity generates sufficient income to cover its debt obligations, while a ratio less than 1 suggests that it does not generate enough income to cover its debt payments.

Formula

DSCR = Net Operating Income (NOI) / Total Debt Service (TDS)

Example

Consider a company with a Net Operating Income of $150,000 and total debt service of $100,000:

DSCR = $150,000 / $100,000 = 1.5

A DSCR of 1.5 indicates that the company generates 1.5 times the income needed to cover its debt payments.

Case

In a case where a real estate investment generates $80,000 in NOI and has $100,000 in TDS:

DSCR = $80,000 / $100,000 = 0.8

This DSCR of 0.8 suggests that the investment does not generate enough income to cover its debt obligations, indicating a potential financial risk.