1. What is Debt Service Coverage Ratio?

The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a company's ability to cover its debt obligations with its operating income. It's commonly used by lenders to assess a borrower's creditworthiness.

2. How Does the Calculator Work?

The calculator uses the DSCR formula:

Where:

• \( NOI \) — Net Operating Income (annual)
• \( Debt\ Service \) — Total annual debt payments (principal + interest)

Explanation: A DSCR of 1 means the company's NOI exactly covers its debt payments. Higher values indicate better ability to service debt.

3. Importance of DSCR Calculation

Details: DSCR is crucial for loan approvals, especially in commercial real estate. Most lenders require a minimum DSCR (often 1.2-1.4) to approve financing.

4. Using the Calculator

Tips: Enter annual NOI and total annual debt service in the same currency. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good DSCR value?
A: Generally, 1.25 or higher is considered good. Below 1 means the company doesn't generate enough income to cover its debt.

Q2: How is DSCR different from interest coverage ratio?
A: DSCR includes both principal and interest payments, while interest coverage ratio only considers interest payments.

Q3: Can DSCR be less than 1?
A: Yes, but this indicates the company cannot fully cover its debt payments from operating income.

Q4: How often should DSCR be calculated?
A: For existing loans, typically annually. For new loan applications, it's calculated based on projected financials.

Q5: Does DSCR vary by industry?
A: Yes, some industries have more volatile cash flows and may require higher DSCRs for loan approvals.