18 August 2010
DSCR (Debt Service Coverage Ratio) is a ratio which is often looked into by Banks when they evaluate a credit proposal. Each bank has a benchmark DSCR below which they get a little reluctant to grant a loan to a company. It shows the debt paying capacity of the company. In the future the bank should get its loan back and as such the company should not default on its obligations. It is calculated by dividing the net operating income by the total debt of the company.
The following formula determines the debt service coverage ratio:
DSCR = Net Operating Income/Total Debt Service or DSCR = (Monthly Net Income)/ (Monthly Principal and Interest Payment on Loan)
A DSCR of 1.0 is called breakeven. A DSCR below 1.0 signals a net operating loss based on the debt structure.