The debt-service coverage ratio (DSCR) is a financial ratio that measures a company’s ability to make its debt payments. It is calculated by dividing a company’s net operating income (NOI) by its total debt payments. The higher the DSCR, the more financially stable a company is considered to be.
The DSCR is used by lenders and investors to assess a company’s ability to pay back its debts. It is typically used to evaluate a company’s creditworthiness and to determine whether it is a good candidate for borrowing or investing. A DSCR of 1.0 or higher is generally considered to be healthy, as it indicates that a company has sufficient income to meet its debt obligations. A DSCR of less than 1.0 may indicate that a company is struggling to meet its debt payments and may be at risk of default.
The DSCR is calculated as follows:
DSCR = NOI / Total debt payments
NOI is calculated by subtracting a company’s operating expenses (such as rent, utilities, and salaries) from its gross revenue. Total debt payments include the principal and interest payments on a company’s outstanding loans and debts.
It is important to note that the DSCR is only one financial ratio and should be considered in conjunction with other financial metrics when evaluating a company’s financial health. Factors such as a company’s liquidity, profitability, and leverage should also be considered when assessing its creditworthiness and financial stability.