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:<math>\text{Debt Service} = \text{Principal Repayment} + \text{Interest Payments} + \text{Lease Payments} </math> <ref>https://propertymetrics.com/blog/how-to-calculate-the-debt-service-coverage-ratio-dscr/</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. Paying down the principle 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 principle payments, DSCR reflects the cash flow situation of an entity.
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