Debt Service Coverage Ratio (DSCR) Calculator

• What is Debt Service Coverage Ratio (DSCR)?
• How to Calculate DSCR
• Using the DSCR Calculator

What is Debt Service Coverage Ratio (DSCR)?

The Debt Service Coverage Ratio (DSCR) is a financial metric used to measure a company's ability to pay its debt obligations. Specifically, it compares an entity's net operating income (NOI) to its total debt service (TDS), which includes interest and principal payments on outstanding debt. A higher DSCR indicates a stronger ability to cover debt payments.

DSCR Formula

The DSCR is calculated using the following formula:

Where:

• Net Operating Income (NOI): This is the income generated from operations, excluding taxes and interest payments. It is calculated as total revenue minus operating expenses.
• Total Debt Service (TDS): This includes all debt repayments due within a period, including both principal and interest payments.

How to Calculate DSCR

To calculate DSCR manually, follow these steps:

• Determine Net Operating Income (NOI): Sum up your total revenue from operations and subtract operating expenses.
• Determine Total Debt Service (TDS): Sum up all debt obligations, including interest and principal payments, due for the period.
• Apply the DSCR Formula: Divide the NOI by the TDS.

For example, if a company has a NOI of $200,000 and a TDS of $150,000, the DSCR would be calculated as follows:

A DSCR of 1.33 means the company generates 1.33 times the income needed to cover its debt obligations.

Using the DSCR Calculator

Our DSCR Calculator is designed to make this process quick and accurate. Here's how to use it:

• Enter Net Operating Income (NOI): Input your net operating income in the provided field.
• Enter Total Debt Service (TDS): Input your total debt service in the provided field.
• Calculate DSCR: Click the `Calculate` button to compute the DSCR.

Example

Let's walk through an example:

• Net Operating Income (NOI): $250,000
• Total Debt Service (TDS): $180,000

By entering these values into the calculator and clicking `Calculate,` you will receive a DSCR value.

If the DSCR is 1.39, it indicates that the business earns 1.39 times the amount needed to cover its debt payments.

Why DSCR is Important

The DSCR is a critical measure for lenders and investors, as it indicates the financial health and creditworthiness of a business. Here are some key points:

• DSCR > 1: Indicates the entity generates sufficient income to cover its debt obligations.
• DSCR < 1: Indicates the entity does not generate enough income to cover its debt obligations, suggesting potential financial distress.

Lenders often set a minimum DSCR requirement (e.g., 1.25) to ensure that a borrower has a buffer to cover debt payments even if income fluctuates.

Tips for Improving DSCR

If your DSCR is lower than desired, consider these strategies:

• Increase Revenue: Boost your income by enhancing sales or diversifying revenue streams.
• Reduce Operating Expenses: Cut unnecessary costs to increase net operating income.
• Refinance Debt: Seek better terms on existing debt to lower total debt service.