Leverage Ratios
Debt Service Coverage Ratio
DSCR measures whether operating income can cover both principal repayment and interest.
Concept First
Learn It Step By Step
Start with the business meaning, then move into the formula.
What is Net Operating Income?
Net Operating Income is an input to Debt Service Coverage Ratio. The line item should match the lesson definition, belong to the same period, and use a consistent unit before calculation. Example: use the matching financial statement line item for the same period and keep the unit consistent before calculating.
What is Total Debt Service?
Debt means interest-bearing borrowings. Depending on the metric, both short-term and long-term borrowings may matter. Example: working-capital loans, term loans, debentures, and other interest-bearing borrowings.
What is Principal?
The debt amount that must be repaid, separate from interest. DSCR and debt service analysis must consider both. Example: use the matching financial statement line item for the same period and keep the unit consistent before calculating.
What is Interest?
Interest is an input to Debt Service Coverage Ratio. The line item should match the lesson definition, belong to the same period, and use a consistent unit before calculation. Example: finance cost paid or payable on bank loans, term loans, or debentures.
How should I read the answer?
DSCR is more comprehensive than ICR. Most banks require at least 1.25x; 1.5x is comfortable; below 1.0x means operations cannot repay debt service.
Formula Lab
Understand the Formula
Read the formula like a business sentence before calculating it.
Formula 1
Net Operating Income / Total Debt Service
Formula 2
Total Debt Service = Principal + Interest
Interpretation
What This Means In Practice
Read the result as a business signal, not as a standalone number.
Debt must be read with repayment capacity
DSCR is more comprehensive than ICR. Most banks require at least 1.25x; 1.5x is comfortable; below 1.0x means operations cannot repay debt service. A leverage number is incomplete until you compare it with EBIT, EBITDA, operating cash flow, interest cost, principal repayment, and stability of earnings.
Risk lens
DSCR shows whether operating cash flow can cover both interest and principal repayments. Lenders use it to judge whether debt can be serviced safely. Debt can support growth, but it also creates fixed obligations. The danger appears when cash generation weakens before debt service does.
Key Takeaway
DSCR shows whether operating cash flow can cover both interest and principal repayments. Lenders use it to judge whether debt can be serviced safely.
Practice Checkpoint
Check Your Understanding
Work through the quiz in smaller sets. Your answers stay visible while this page is open, so you can review before moving on.
Question 1 of 20
Level 1Why is DSCR more comprehensive than ICR?
Question 2 of 20
Level 1Which institution uses DSCR heavily?
Question 3 of 20
Level 1Which underlying item must you understand before calculating or interpreting the result?
Question 4 of 20
Level 1Which statement is the best conceptual reading of this measure?
Question 5 of 20
Level 1While analysing the result, which connected business driver should you also check because it can explain movement in the result?
15 questions remaining in this lesson.
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Ratio Analysis - An Introduction
Ratio Analysis Foundations
Knowledge Path
Connected Concepts
3 linked lessons