Debt Coverage Ratio

What is the Debt Coverage Ratio.

Debt coverage ratio. Debt coverage ratio is a cash-flow based solvency ratio which measures the adequacy of cash flow from operations in relation to a companys total debt level. The ratio is used by lenders to evaluate loans on income-producing propertyA ratio of 12 or better will usually support the extension of credit. A DSCR of less than 1 suggests an inability to serve the companys debt.

In corporate finance it is the amount of cash flow available to meet annual interest and principal payments on debt including sinking fund payments. Improve your vocabulary with English Vocabulary in Use from Cambridge. Your debt coverage ratio has a direct impact on this as one of the most leading indicators of your ability to pay your lender back.

Most lenders require a debt coverage ratio DCR of between 125 135. The debt service coverage ratio is a common benchmark to measure the ability of a company to pay its outstanding debt including principal and interest expense. Debt service coverage ratio DSCR is one of many financial ratios that lenders assess when considering a loan application.

In other words this ratio compares a companys available cash with its current interest principle and sinking fund obligations. The debt coverage ratio is used in banking to determine a companies ability to generate enough income in its operations to cover the expense of a debt. But were getting ahead of ourselves.

Debt coverage ratio DCR The ratio of net operating income compared to annual debt service which includes principal and interest payments. On a broader level it may also be used internally by a company for the same reason. Learn the words you need to communicate with confidence.

The debt service coverage ratio is a financial ratio that measures a companys ability to service its current debts by comparing its net operating income with its total debt service obligations. Join us today as we break down the debt coverage ratio what it means and why its so important to your business. A coverage ratio broadly is a metric intended to measure a companys ability to service its debt and meet its financial obligations such as interest payments or dividends.