# Debt-Service Coverage Ratio (DSCR)

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Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.
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The debt-service coverage ratio (DSCR) is a financial metric used to assess a company’s ability to repay its debt obligations.

The ratio is calculated by dividing a company’s net operating income (NOI) by its debt service, which includes principal and interest payments on loans and leases.

A DSCR of 1.0 or higher indicates that a company has enough income to cover its debt payments.

A lower ratio may indicate that a company is at risk of defaulting on its debt obligations.

The DSCR can be used to assess the riskiness of a company’s debt financing.

For example, lenders may require a higher DSCR for loans to companies with lower credit ratings.

A higher DSCR may also be required for loans with longer terms.

The DSCR is also sometimes used as a measure of a company’s financial health.

A higher DSCR may indicate that a company is in better financial health than a company with a lower DSCR.

## How to Calculate the Debt-Service Coverage Ratio (DSCR) (DSCR Formula)

The debt-service coverage ratio (DSCR) is calculated by dividing a company’s net operating income (NOI) by its debt service.

DSCR = net operating income / debt service

Where:

• net operating income is a company’s total revenue less its operating expenses, and
• debt service includes principal and interest payments on loans and leases

For example, let’s assume that ABC Company has annual revenue of \$100,000,000 and annual operating expenses of \$80,000,000.

ABC Company’s net operating income would be \$20,000,000 (\$100,000,000 – \$80,000,000).

Now let’s assume that ABC Company’s debt service is \$15,000,000 per year.

This includes interest payments of \$10,000,000 and principal payments of \$5,000,000.

ABC Company’s debt-service coverage ratio would be 1.33 (\$20,000,000/\$15,000,000).

This means that ABC Company has enough income to cover its debt obligations.

## How to Calculate Debt Service Coverage Ratio (DSCR) in Excel

The debt-service coverage ratio (DSCR) can be calculated using Microsoft Excel.

It can be done by taking the cell address for a company’s net operating income and dividing it by the cell address for a company’s debt service payments.

For example, let’s assume that ABC Company’s net operating income is in cell B2 and its debt service payments are in cell C2.

The debt-service coverage ratio formula in Excel would be =A1/A2. This would give you the DSCR for ABC Company.

## How to Interpret the Debt-Service Coverage Ratio (DSCR)

A debt-service coverage ratio (DSCR) of 1.0 or higher indicates that a company has enough income to cover its debt payments.

A lower DSCR may indicate that a company is at risk of defaulting on its debt obligations.

The debt-service coverage ratio can be used to assess the riskiness of a company’s debt financing.

For example, lenders may require a higher DSCR for loans to companies with lower credit ratings. A higher DSCR may also be required for loans with longer terms.

The debt-service coverage ratio is also sometimes used as a measure of a company’s financial health. A higher DSCR may indicate that a company is in better financial health than a company with a lower DSCR.

The debt-service coverage ratio is just one financial metric that can be used to assess a company’s ability to repay its debt obligations.

Other metrics, such as the debt-to-equity ratio and the interest coverage ratio, may also be useful in this assessment.

## Interest Coverage Ratio vs. DSCR

The debt-service coverage ratio (DSCR) and the interest coverage ratio (ICR) are both financial ratios that can be used to assess a company’s ability to repay its debt obligations.

The DSCR measures a company’s ability to repay its debt obligations from its operating income. The ICR measures a company’s ability to repay its debt obligations from its earnings before interest and taxes (EBIT).

Both ratios are useful in assessing a company’s debt repayment ability.

However, the ICR may be more useful in some cases because it excludes interest payments from its numerator (earnings before interest and taxes). This makes the ICR less likely to be affected by changes in a company’s capital structure.

## What Is a Good Debt-Service Coverage Ratio?

There is no definitive answer to this question. The debt-service coverage ratio (DSCR) that is considered “good” will vary depending on the company’s industry, credit rating, and other factors.

In general, a higher DSCR is better than a lower DSCR.

A DSCR of 1.0 or higher indicates that a company has enough income to cover its debt payments. A lower DSCR may indicate that a company is at risk of defaulting on its debt obligations.

Different industries and different types of companies will have different target DSCRs.

For example, banks and other financial institutions typically require a higher DSCR for loans than other types of lenders. This is because banks are more regulated and have to adhere to stricter capital requirements.

Similarly, companies with lower credit ratings will typically have to target a higher DSCR than companies with higher credit ratings.

This is because lenders view companies with lower credit ratings as being more likely to default on their debt obligations.

## What Can You Do if Your Debt-Service Coverage Ratio Is Too Low?

There are several things that you can do if your debt-service coverage ratio (DSCR) is too low.

One option is to try to increase your company’s net operating income.

This can be done by increasing revenues or reducing expenses.

Another option is to try to reduce your company’s debt service payments. This can be done by refinancing your debt, paying it down, or by negotiating with your lenders.

You may also want to consider raising additional capital. This can be done by issuing new equity or debt, or by taking out a loan.

Whatever strategy you choose, it is important to remember that a higher DSCR is generally better than a lower DSCR. You should therefore try to take actions that will increase your DSCR.

## DSCR Loan

A DSCR loan is common in real estate.

It is often used in commercial real estate or among individuals who may not qualify for traditional mortgages (e.g., in cases of large business write-offs leaving little adjusted gross income – i.e., taxable income).

It involves a debt service coverage ratio that the borrower must maintain during the life of the loan. The DSCR is a debt-to-income ratio and is used by lenders to determine creditworthiness.

The debt service coverage ratio (DSCR) is a financial ratio that measures a company’s ability to repay its debt obligations from its operating income. The DSCR is calculated by dividing a company’s operating income by its debt service payments.

A higher DSCR indicates that a company has more income available to make its debt payments.

The debt service coverage ratio (DSCR) is just one financial metric that can be used to assess a company’s ability to repay its debt obligations.

Other metrics, such as the debt-to-equity ratio and the interest coverage ratio, can also be useful in assessing a company’s debt repayment ability.

## Debt-Service Coverage Ratio (DSCR) – FAQs

### What is the debt-service coverage ratio (DSCR)?

The debt-service coverage ratio (DSCR) is a financial ratio that measures a company’s ability to repay its debt obligations from its operating income.

The DSCR is calculated by dividing a company’s operating income by its debt service payments.

A higher DSCR indicates that a company has more income available to make its debt payments.

### What is a good debt-service coverage ratio?

A DSCR of 1.0 or higher indicates that a company has the ability to make its loan payments out of its current income.

A DSCR of less than 1.0 means that a company does not have enough income to make its loan payments and will likely default on its loans.

Lenders typically require a minimum DSCR of 1.2 – 1.5 in order to approve a loan.

However, some lenders may be willing to approve a loan with a lower DSCR if the borrower has strong collateral or a solid business plan.

DSCR is an important financial metric that all borrowers should understand before taking out a loan.

Borrowers with a high DSCR will have an easier time securing financing, while those with a low DSCR may face difficulty in obtaining funding.

### What can you do if your debt-service coverage ratio is too low?

There are several things that you can do if your debt-service coverage ratio (DSCR) is too low.

One option is to try and negotiate with your lenders for more favorable terms. This may include extending the term of your loan, or obtaining a grace period on interest payments.

Another option is to increase your revenue by finding new sources of income or increasing your prices. Finally, you can also reduce your expenses by cutting back on non-essential expenditures.

Whatever course of action you decide to take, it is important to develop a plan and stick to it in order to improve your financial situation.

### What is a debt-service coverage ratio loan?

A DSCR loan is often found in commercial real estate or for business expansion purposes.

The loan is structured to provide a certain level of debt service coverage, meaning that the loan payment (including interest, principal, and any other required payments, such as leases and other debt-like obligations) cannot exceed a set percentage of the borrower’s income.

This provides lenders with some assurance that the loan will be repaid even if the borrower’s income decreases.

DSCR loans are typically used for larger projects or those with a higher risk profile, since they offer more protection to the lender in case of default.

Borrowers with strong credit histories and stable incomes may be able to qualify for a DSCR loan with a lower interest rate than they would get for a traditional loan.

However, borrowers with less-than-perfect credit or income may have to pay a higher interest rate to get approved for a DSCR loan.

## Summary – Debt-Service Coverage Ratio (DSCR)

The debt-service coverage ratio (DSCR) is a debt-to-income ratio that is used by lenders to determine creditworthiness.

A higher DSCR is generally better than a lower DSCR. Different industries and different types of companies will have different target DSCRs.

If your debt-service coverage ratio is too low, you can try to increase your company’s net operating income or reduce your company’s debt service payments. You may also want to consider raising additional capital.

A debt-service coverage ratio loan is a loan that requires the borrower to maintain a debt service coverage ratio during the life of the loan.

Debt-service coverage ratio loans typically have stricter requirements than other types of loans. They can be either fixed-rate or variable-rate loans.

Debt-service coverage ratio loans are typically used by businesses for working capital or expansion purposes. They can also be used by individuals for debt consolidation or other purposes.