The Debt Capacity Calculator is a financial tool used to determine how much debt an individual or business can responsibly take on without jeopardizing financial stability. It helps assess whether a borrower can afford additional loans while maintaining healthy cash flow and debt service coverage.
This tool is useful for:
- Businesses looking to expand through financing.
- Investors evaluating corporate financial health.
- Lenders assessing creditworthiness.
- Governments and municipalities determining borrowing limits.
By calculating debt capacity, borrowers can ensure they do not exceed their ability to service debt, reducing financial risk.
Formula of Debt Capacity Calculator
To calculate Debt Capacity, use the following formula:
Debt Capacity = (EBITDA × Debt Service Coverage Ratio) / Annual Debt Service
Where:
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
EBITDA = Net Income + Interest Expense + Taxes + Depreciation + Amortization- Net Income = Total earnings after all expenses, including interest and taxes.
- Interest Expense = Cost of debt financing.
- Taxes = Income taxes paid.
- Depreciation = Reduction in asset value over time.
- Amortization = Spread of intangible asset costs over time.
- Debt Service Coverage Ratio (DSCR)
The required DSCR is usually 1.25 or higher, meaning the borrower must generate at least 1.25 times the debt payment in earnings. - Annual Debt Service
The total of principal and interest payments due annually on all outstanding debts.
Interpreting the Result:
- Higher Debt Capacity → Indicates financial flexibility to take on additional debt.
- Lower Debt Capacity → Suggests limited ability to service new debt.
Debt Capacity Reference Table
The following table provides a quick reference for different debt capacity scenarios:
| EBITDA ($) | DSCR | Annual Debt Service ($) | Debt Capacity ($) |
|---|---|---|---|
| 500,000 | 1.25 | 100,000 | 6,250,000 |
| 1,000,000 | 1.50 | 200,000 | 7,500,000 |
| 750,000 | 1.25 | 150,000 | 6,250,000 |
| 1,500,000 | 1.75 | 300,000 | 8,750,000 |
This table helps businesses and lenders quickly estimate maximum borrowing limits based on earnings and debt obligations.
Example of Debt Capacity Calculator
A business has the following financial data:
- EBITDA = $1,000,000
- DSCR = 1.5
- Annual Debt Service = $200,000
Using the formula:
Debt Capacity = (1,000,000 × 1.5) / 200,000
Debt Capacity = 1,500,000 / 200,000 = 7.5 million dollars
Interpretation:
- The company can safely support up to $7.5 million in total debt while maintaining financial stability.
Most Common FAQs
It helps borrowers, lenders, and investors evaluate how much debt is manageable without financial strain, ensuring long-term stability.
A DSCR of 1.25 or higher is considered financially sound, meaning a company generates at least 25% more earnings than required to cover debt payments.
Yes. While a high debt capacity indicates borrowing potential, taking on excessive debt increases financial risk and can lead to cash flow issues.