Debt service coverage ratio
DSCR
In one sentenceCash available from operations divided by the financing installments and financing cost due during the period, showing whether the business can service its debt.
Simply put
Interest coverage looks at financing cost alone, but the business also repays the loan principal. This ratio combines both, which is why lenders focus on it when studying an application.
A ratio below 1 means operations are not enough to pay the installments, and the business will pay from its saved cash or with new financing.
Worked example
A feed factory generated cash available from operations of 600,000 SAR for the year, and has financing installments with principal of 300,000 SAR and financing cost of 100,000 SAR.
Cash available for debt service600,000 SAR
Annual debt service300,000 + 100,000 = 400,000 SAR
Ratio = 600,000 ÷ 400,0001.5 times
Formula: Cash available from operations ÷ (installment principal + financing cost)
Don't confuse it with
Interest coverage ratioIt divides operating profit by financing cost only, without the loan principal, so it appears higher than the debt service coverage ratio.