Debt-Service Coverage Ratio (DSCR)

Is considered a more comprehensive and apt measure to compute debt service capacity of a business firm. It provides the value in terms of the number of times the total debt service obligations consisting of interest and repayment of principal in installments are covered by the total operating funds available after the payment of taxes: Earnings after taxes, EAT + Interest + Depreciation + Other non-cash expenditures like amortization (OA). Symbolically,

1

The higher the ratio, the better it is. A ratio of less than one may be taken as a sign of long-term solvency problem as it indicates that the firm does not generate enough cash internally to service debt. In general, lending financial institutions consider 2:1 as satisfactory ratio.

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