Lenders often use the DSCR to evaluate a company’s ability to repay a loan. A higher DSCR generally indicates that the company is less risky and more likely to be able to repay the loan.
The debt service coverage ratio (DSCR) is a financial ratio used to evaluate a company’s ability to meet its debt obligations. Specifically, it measures the amount of cash flow available to cover debt payments, including principal and interest.
The DSCR is calculated by dividing the company’s annual net operating income (NOI) by its annual debt payments. The resulting ratio represents the number of times the company’s cash flow can cover its debt obligations. For example, if a company has a DSCR of 2, it means its cash flow is twice the amount of its debt payments.
A DSCR of 1 or higher is generally considered a good indicator that a company has sufficient cash flow to cover its debt payments. However, the ideal DSCR may vary depending on the industry and other factors.
Overall, the DSCR is an important financial ratio that can help investors, lenders, and business owners assess a company’s financial health and ability to manage debt.