This debt service coverage ratio calculator measures the proportion of Net Operating Income against the total debt service of a company, which ideally should be greater than 1. The debt service coverage ratio formula and some more information on this topic can be found below the form.
How does this debt service coverage ratio calculator work?
The algorithm behind this debt service coverage ratio calculator is based on the formula detailed below that requires two variables:
Net Operating Income (NOI).
Total Debt Service (TDS) representing all the obligations the company has according to its balance sheet.
Debt Service Coverage Ratio formula (DSCR) = NOI / TDS
Debt service coverage ratio definition
This ratio is defined and interpreted by 3 different approaches:
In personal finance this indicator is used by banks and similar financial institutions to estimate the income property loans and is taken as a positive signal if it is greater than 1 because that indicates the property in question generates enough revenue to repay in due time its associated debts.
In government finance the DSCR ratio is directly linked with measuring the optimal amount of export earnings that are further on used to pay the principal and interest for the debts the country has from external institutions or entities.
In corporate finance the debt service coverage ratio makes reference to the amount of positive cash flow a business is generating that is further used to pay the debts (principal & interest) for the debts the company has.
The interpretation of the debt service coverage ratio level
A debt service coverage ratio < 1 demonstrates the cash flow is negative.
A debt service coverage ratio > 1 indicates a positive cash flow, thus it is considered as a positive signal.
Example of a calculation
In case of a retail company with this situation:
Net Operating Income = $1,560,000
Total Debt Service = $1,125,000
The debt service coverage ratio that results is 1.39 (or 138.67%).01 Dec, 2014