1. What is DSCR?

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 the risk of lending to a business.

2. How Does the Calculator Work?

The calculator uses the DSCR formula:

Where:

• \( NOI \) — Net Operating Income (revenue minus operating expenses)
• \( Debt\ Service \) — Total debt payments (principal + interest)

Interpretation: A DSCR of 1 means the company's NOI exactly covers its debt payments. Higher than 1 indicates the company can cover its debt with income to spare, while below 1 indicates potential difficulty meeting debt obligations.

3. Importance of DSCR Calculation

Details: Lenders typically require a minimum DSCR (often 1.2-1.4) for loan approval. It's crucial for assessing financial health, securing financing, and managing debt levels.

4. Using the Calculator

Tips: Enter NOI and Debt Service in the same currency. Both values must be positive numbers. The result is unitless and represents the coverage ratio.

5. Frequently Asked Questions (FAQ)

Q1: What is a good DSCR ratio?
A: Generally, 1.25 or higher is considered good by most lenders. Below 1 indicates negative cash flow.

Q2: How does DSCR differ from debt-to-income ratio?
A: DSCR focuses on business cash flow relative to debt payments, while debt-to-income compares personal debt payments to personal income.

Q3: Can DSCR be too high?
A: While high DSCR indicates strong coverage, extremely high ratios might suggest underutilized borrowing capacity.

Q4: How often should DSCR be calculated?
A: Businesses should monitor DSCR regularly, especially when considering new debt or during financial reviews.

Q5: What if my DSCR is below 1?
A: This indicates insufficient income to cover debt payments. Consider increasing revenue, reducing expenses, or restructuring debt.