# DSCR Formula

Article byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

## What is the DSCR Formula?

DSCR (Debt service coverage ratio) formula provides an intuitive understanding of the debt repayment capacity of the company. It is calculated as the ratio of Net Operating Income to Total Debt Service.

DSCR Formula = Net Operating Income / 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, that need to be paid in the coming year.

### Key Takeaways

1. DSCR helps an investor comprehend the debt-fulfilling ability of a company. It helps the investor understand the fiscal state of a company and check whether the company is established or not.
2. One can calculate DSCR by dividing the company’s net operating income by the total debt service. The value that is thus generated is interpreted in two ways; if the ratio is more than one, the ratio is good, and it suggests that the company can fulfill its debt using its income.
3. A DSCR ratio of less than one indicates that the company cannot pay its debts using its current earnings and that it isn’t a well-established company.
4. A high DSCR ratio indicates that the company has higher odds of qualifying for a loan and a better chance to get a lower interest rate, and the business is flourishing.

For eg:
Source: DSCR Formula (wallstreetmojo.com)

### Explanation

It must include all the debt obligation in hand like the following:

• Bank loan
• Leases
• Monthly payments for debt service

Most lenders use operating income, which is equivalent to EBIT. But some also use the ratio.

Financial Modeling & Valuation Course (25+ Hours of Video Tutorials)

If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

### Examples of  DSCR Formula (with Excel Template)

Let’s see some simple to advanced examples to understand it better.

You can download this DSCR Formula Excel Template here – DSCR Formula Excel Template

#### 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 calculate 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 a yearly interest of \$70,000 on the loan he had taken. Therefore the lender will calculate DSCR to determine whether to grant a loan to the real estate developer.

• DSCR = 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 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.

#### Example #2

Calculate the DSCR for company X, which has the following Income Statement.

Therefore, Operating Income = \$13000

Debt Service = \$5000

So, the calculation of DSCR will be as follows –

• DSCR =   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.

#### Example #3

We will calculate the debt service coverage ratio of ILandFS Engineering and Construction Company. We can get the operating profit data, equivalent to operating income and debt service, from the 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 the DSCR formula will be as follows –

• DSCR = 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.

#### Example #4

We will calculate the debt service coverage ratio of MEP Infrastructure Developers. We can get the operating profit and debt service data from the 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 will be as follows –

• DSCR = 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.

### DSCR Calculator

You can use the following DSCR calculator.

 Net Operating Income Total Debt Service DSCR Formula

DSCR Formula =
 Net Operating Income = Total Debt Service
 0 = 0 0

### Importance

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 Formula?

A DSCR ratio of 1 and above is a good ratio. The higher, the better.

• A ratio higher than one indicates that it is generating sufficient cash flow to cover its debt service.
• A ratio less than 1 indicates that there is insufficient 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.

Most lenders 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 be able to repay. The DSCR ratio gives an insight into the company’s cash flow and how much cash 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 can get.

### Benefits of a High DSCR

• Higher chances of qualifying for a loan
• Better chances to get a lower interest rate.
• Businesses can manage debt obligations in a better way.

Therefore higher the ratio, the better it is.

How to calculate DSCR in excel?

Since this concept has a clear-cut formula that analysts can use to understand the outcome, it can easily be calculated in excel by dividing the company’s total net operating income by its total debt service.

What is a good DSCR for a rental property?

The formula for calculating DSCR for rental property is divided using PITIA constituting monthly principal, interest, taxes, insurance, and association dues by the gross monthly rent. Therefore, the above 1.2 ratios are considered good and appropriate for the investor to decide.

Can someone externally improve their debt service coverage ratio?

If the interest rate is reduced, the interest amount would decrease, reducing the installment. It thus limits the denominator (total debt service) and improves the DSCR ratio.

### Recommended Articles

This article has been a guide to the DSCR formula. Here we discuss the formula to calculate the debt service coverage ratio using practical examples and downloadable excel templates. You may learn more about Financial Analysis from the following articles –