Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Change in Net Working Capital (NWC) Formula
- Cash Flow from Operations Ratio
- Cash Flow Per Share
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score
- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Days Sales Uncollected
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio
- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Markup Percentage Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula
What is DSCR Formula (Debt service coverage ratio)?
Debt service coverage ratio (DSCR) formula provides an intuitive understanding of the debt repayment capacity of the company and is calculated as the ratio of Net Operating Income to Total Debt Service.
Net operating income is calculated as a company’s revenue minus its operating expenses. In most cases, lenders use net operating profit which is the same as the net operating income. Total debt service is the current debt obligations like loans, sinking funds that need to be paid in the coming year.
Explanation of DSCR Formula
The Debt service coverage ratio formula must include all the debt obligation in hand like the following:
- Bank loan
- Short term loans
- Monthly payments for debt service
Most lenders use operating income which is equivalent to EBIT. But some also use EBITDA to calculate the ratio.
Examples of DSCR Formula (with Excel Template)
Let’s see some simple to advanced examples of debt service coverage ratio formula to understand it better.
DSCR Formula – Example #1
Let’s suppose a real estate developer wants to take a loan from a local bank. Then the lender will first want to do the calculation of the DSCR to determine the ability of the borrower to repay its loan. The real estate developer discloses that it has an operating income of $200,000 per year and has to pay yearly interest of $70,000 on his loan that he had taken. Therefore the lender will do the calculation of DSCR to determine whether to grant a loan to the real estate developer.
- DSCR Formula = 200,000 / 70,000
- DSCR = 2.857
A DSCR of 2.857 is a good DSCR for granting of a loan to the real estate developer.
Now if the developer has also lease payments to pay then of $5000 then the debt service will increase to $75000.The new DSCR will be as follows:-
- DSCR= 200,000 / 75,000
- DSCR = 2.66
Therefore the DSCR decreased with an increase in debt service payments.
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DSCR Formula – Example #2
Calculate the DSCR for company X who has the following Income Statement.
The operating income is calculated by subtracting the expenses from the gross profit.
Therefore, Operating Income = $13000
Debt Service = $5000
So, the calculation of DSCR will be as follows –
- DSCR Formula = 13000 / 5000
DSCR will be –
- DSCR = 2.6
A DSCR of 2.6 indicates that the company has enough cash to cover its debt obligations.
DSCR Formula – Example #3
We will calculate the debt service coverage ratio of ILandFS Engineering and Construction Company. We can get the data of operating profit which is equivalent to operating income and debt service from profit & loss statement which is available in money control.
The net operating profit is ₹160.92 in the year 2018.
As for the debt service, we can see that it needs to pay interests that is ₹ 396.03.
Therefore calculation of DSCR formula will be as follows –
- DSCR Formula = 160.92 / 396.03
DSCR will be
- DSCR = 0.406
A DSCR of 0.406 indicates that the company doesn’t have enough cash to cover its debt obligations.
DSCR Formula – Example #4
We will calculate the debt service coverage ratio of MEP Infrastructure Developers. We can get the data of operating profit and debt service from profit & loss statement which is available in money control.
The net operating profit is ₹218.26 in the year 2018.
As for the debt service, we can see that it needs to pay interests and taxes which is ₹50.04.
Calculation of DSCR formula will be as follows –
- DSCR Formula = 218.26 / 50.04
DSCR will be
- DSCR = 4.361
A DSCR of 4.361 indicates that the company has enough cash to cover its debt obligations.
You can use the following DSCR calculator.
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Importance of DSCR Formula
DSCR is both important to creditors and investors but creditors analyze it more as it determines the ability of the lender to repay the current debt.
The DSCR ratio will determine whether the borrower will get his loan approved and the terms and conditions of the loan.
How to Interpret DSCR?
A DSCR ratio of 1 and above is a good ratio. The higher the better.
- A ratio higher than 1 indicates that it is generating sufficient cash flow to cover its debt service.
- A ratio less than 1 indicates that there is not enough cash to cover the debt obligations.
A DSCR of 0.85 indicates that there is only enough operating income to cover 85% of the debt payments.
Mostly lender look for a DSCR ratio of 1.15 or more depending on the economic conditions of the company.
A lender will never want to make a loss by giving a loan to a borrower who may never able to repay. The DSCR ratio gives an insight into the company’s cash flow and how much cash does the company has to repay its loan.
It is of great importance in real estate or commercial lending as this ratio gives us an idea about the maximum loan amount a lender will be able to get.
Benefits of a High DSCR
- Higher chances of qualifying for a loan
- Better chances to get a lower interest rate.
- Business can manage the debt obligations in a better way.
Therefore higher the ratio, better it is.
This has been a guide to DSCR Formula. Here we discuss formula to calculate Debt service coverage ratio using practical examples along with downloadable excel templates. You may learn more about Financial Analysis from the following articles –