Debt Service Coverage Ratio (DSCR)

DSCR is a metric used by lenders and investors to assess a company's ability to cover its debt payments. It provides insights into whether a business generates enough cash flow to meet its debt obligations, including both principal and interest payments.

Net Operating Income (NOI)

Calculation: NOI is derived by subtracting operating expenses from operating revenues. It represents the cash generated by the core operations of a business.
Inclusion: Rental income, gross income, and other revenue streams contribute to NOI.

Total Debt Service

Components: Total Debt Service includes principal and interest payments on loans.
Inclusion: Mortgage payments, interest on loans, and any other debt-related payments are considered.

Interpretation of DSCR

DSCR above 1 indicates that the company generates sufficient cash flow to cover its debt obligations.

DSCR equal to 1 suggests that the business is just able to meet its debt obligations.

DSCR below 1 implies that the company may face challenges in meeting its debt payments.

Interest Service Coverage Ratio (ISCR)

While DSCR assesses the ability to cover both principal and interest, ISCR specifically focuses on a company's capacity to meet its interest payments. The formula for ISCR is similar to DSCR, but it considers only the interest component:

Strategic Implications

Lender Confidence:

Higher Ratios: A higher DSCR and ISCR instill confidence in lenders, making it easier for a company to secure financing. but this is not always the case. There is a upper limit and industry specific ideal ratio limits to observe.

Risk Mitigation: Strong ratios reduce the perceived risk of default.

Business Planning:

Proactive Measures: Monitoring DSCR and ISCR guides businesses in taking proactive measures to enhance cash flow and profitability.

Strategic Decision-Making: Insights from these ratios aid in strategic decision-making, such as debt restructuring or refinancing.