Debt Service Coverage Ratio (DSCR) is calculated to determine ability of business operations to repay loan instalments and interest. DSCR is used by banks to evaluate operating effectiveness of business to cover risk on financing. DSCR is calculated by dividing PBITD by interest and loan repayment.
DSCR or Debt Service Coverage Ratio helps to evaluate whether a business is able to meet its loan obligations from its operations.
DSCR is calculated to check whether business is able to generate enough cash to repay loan repayments. A healthy DSCR ratio is above 1, DSCR above 1 shows that business is able to meet its loan repayment obligations from operations. Enough cash is generated to repay principal and interest.
Formula to calculate DSCR = PBID/Loan Repayment
DSCR is calculated by dividing profit before interest and depreciation by loan obligations. Various possible DSCR ratio and their implication is as follow:
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