What does Debt Service Coverage Ratio (DSCR) mean?

Debt Service Coverage Ratio (DSCR)

Debt Service Coverage Ratio (DSCR) gauges how easily net operating income covers annual debt obligations, indicating financial stability. A DSCR of 1.0 means income precisely matches debt payments; above 1.0 suggests surplus funds, while below 1.0 signals potential shortfalls in meeting installments. Lenders, investors, or underwriters use it to judge creditworthiness and default risk.

Key Points:

• Formula: Net Operating Income ÷ Total Debt Service = DSCR.
• Benchmark: Many financiers expect at least 1.2, providing a cushion above break-even.
• Purpose: Evaluates solvency, ensuring an asset or enterprise generates enough cash flow.
• Influences: A strong DSCR can secure better loan terms or expansion capital.

Overall, DSCR helps stakeholders confirm that cash inflows surpass the sum of principal and interest, reflecting the borrower’s capacity to handle obligations reliably.