What the debt service coverage ratio tells you
DSCR compares the income a borrower has available to pay its debts with the loan payments due in the same period. Debt service means every scheduled loan payment, principal as well as interest, which makes DSCR a stricter test than a ratio that looks at interest alone.
Property loans and business loans are usually measured differently, so the calculator offers both versions:
- Property: net operating income. This is the version property lenders usually use for income-producing real estate. Net operating income is what the property earns from rents and other income after its running costs, but before loan payments, depreciation and income tax. Annual debt service is the year’s total of principal and interest payments.
- Business: EBITDA. This is a common version for an operating company. EBITDA (earnings before interest, taxes, depreciation and amortization) stands in for the earnings the business generates from its operations, and debt service is interest expense plus scheduled principal repayments.
A result of 1.50 means the income figure covered the period’s debt payments one and a half times: for every 1.00 due, there was 1.50 of income. A result of 1.00 means income exactly matched the payments. Below 1.00, income fell short, so the gap had to be met from cash reserves, the owners or further borrowing.
Reading a high or low result
- A low ratio leaves little room for income to fall before payments go uncovered. It can mean the debt is large relative to income, that income dipped in a difficult year, or that the loan is repaid over a short term, which raises the principal due each year.
- A high ratio means income could fall further before payments were at risk. It reflects only the period measured, though, and a loan on a variable interest rate can see its debt service rise later.
Lenders define both the income figure and debt service in their loan agreements, including which adjustments count, and they set their own required levels. When you check a loan covenant, use the lender’s definitions rather than a figure from this calculator. For your own analysis, compare the ratio with the same property or business in earlier periods.
What the ratio does not show
- EBITDA is not cash. It leaves out spending on equipment, cash tied up in inventory and receivables, and tax paid, all of which use cash that cannot go to lenders.
- Net operating income can be measured in more than one way. Some lenders deduct an allowance for replacing building components and equipment before they calculate it, which gives a lower ratio.
- It shows the payments due in one period, not the total amount of debt or when it falls due.
Common mistakes
- Counting only interest as debt service. DSCR includes principal repayments as well.
- Starting from a profit figure that is already after interest, such as net income. Net operating income and EBITDA are both measured before interest, so a post-interest figure counts the interest twice.
- Mixing periods, for example a year of income against one quarter’s loan payments. Both figures should cover the same period.
- Assuming your figure matches the lender’s. Lenders often adjust EBITDA or net operating income, for example for one-off items, so their result can differ from yours.
Related measures
The interest coverage ratio compares operating income with interest expense only, so it ignores principal repayments. To work out the EBITDA figure for the business version, use the EBITDA calculator. The debt-to-equity ratio looks at how much debt the business carries on its balance sheet, rather than whether its income covers the payments.