Debt service coverage ratio: Difference between revisions

Revision as of 08:59, 7 July 2022

Revision as of 09:02, 7 July 2022

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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

:[[Interest obligations]] + [[Principal obligations]] + Tax Expense ''assuming minimum sufficient income'' + Other necessary expenditures[[expenditure]]s not treated as accounting expenses, like dividends and [[CAPEX]].

The DSCR calculation under the Pre-Tax Provision Method is

:{{bigmathbig|{{sfrac|EBITDA |(Interest) + (Pre-tax Provision for Post-Tax Outlays)}}}},

where '''Pre-tax Provision for Post-tax Outlays''' is the amount of pretax cash that must be set aside to meet required post-tax outlays, i.e.,

:CPLTD + (Unfinanced CAPEX) + Dividends.

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:(Pretax provision for post-tax outlays) = (Post-tax outlays)

For example, if a company's post-tax outlays consist of CPLTD of {{US$|long=no|90M}} and {{US$|long=no|10M}} in unfinanced CAPEX, and its noncash expenses are {{US$|long=no|100M}},

then the company can apply {{US$|long=no|100M}} of cash inflow from operations to post-tax outlays without paying taxes on that {{US$|long=no|100M}} cash inflow. In this case, the pretax cash that the borrower must set aside for post-tax outlays would simply be {{US$|long=no|100M}}.

''If'' (post-tax outlays) > (noncash expenses), ''then''