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{{Short description|Financial metric}}
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The '''debt service coverage ratio''' ('''DSCR'''), known as "debt coverage ratio" (DCR), is a financial metric used to assess an entity's ability to generate enough cash to cover its [[Debt servicing|debt service]] obligations. These obligations include interest, principal, and lease payments. The DSCR is calculated by dividing the operating income available for debt service by the total amount of debt service due.
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:{{math|Debt Service {{=}} (Principal Repayment) + (Interest Payments) + (Lease Payments)}}<ref>{{Cite web|url=https://propertymetrics.com/blog/how-to-calculate-the-debt-service-coverage-ratio-dscr/|title=How to Calculate the Debt Service Coverage Ratio (DSCR)|date=17 February 2016 }}</ref>
To calculate an entity's debt coverage ratio, you first need to determine the entity's [[net operating income]] (NOI). NOI is the difference between gross revenue and operating expenses. NOI is meant to reflect the true income of an entity or an operation without or before financing. Thus, not included in operating expenses are financing costs (e.g. interests from loans), personal income tax of owners/investors, capital expenditure and depreciation.
Debt Service are costs and payments related to financing. Interests and lease payments are true costs resulting from taking loans or borrowing assets. Paying down the principal of a loan does not change the net equity/liquidation value of an entity; however, it reduces the cash an entity processes (in exchange of decreasing loan liability or increasing equity in an asset). Thus, by accounting for principal payments, DSCR reflects the cash flow situation of an entity.
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stated in a press release that it had lowered the credit ratings of
four certificates in the Bank of America Commercial Mortgage Inc.
deterioration of the pool". They further go on to state that this
downgrade resulted from the fact that eight specific loans in the
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this does not necessarily mean they will default.
===Pre-Tax Provision Method===
Income taxes present a special problem to DSCR calculation and interpretation. While, in concept, DSCR is the ratio of cash flow available for debt service to required debt service, in practice – because interest is a tax-deductible expense and principal is not – there is no one figure that represents an amount of cash generated from operations that is both ''fully available'' for debt service and ''the only cash available'' for debt service.
While [[Earnings before interest, taxes, depreciation and amortization
Debt Service Coverage Ratio as calculated using the Pre-Tax Provision Method answers the following question: How many times greater was the company's EBITDA than its critical EBITDA value, where critical EBITDA is that which just covers its
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For example, if post-tax outlays consist of CPLTD of {{US$|long=no|100M}} and noncash expenses are {{US$|long=no|50M}}, then the borrower can apply {{US$|long=no|50M}} of cash inflow
from operations directly against {{US$|long=no|50M}} of post-tax outlays without paying taxes on that {{US$|long=no|50M}} inflow, but the company must set aside {{US$|long=no|77M}}
(assuming a 35% income tax rate) to meet the remaining {{US$|long=no|50M}} of post-tax outlays. This company's pretax provision for post-tax outlays = {{US$|long=no|50M}} + {{US$|long=no|77M}} = {{US$|long=no|127M}}.
==See also==
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