A Debt Service Coverage Ratio (DSCR) Calculator helps businesses, real estate investors, and financial institutions evaluate whether a company or an investment property generates enough income to cover its debt obligations. This ratio is a crucial metric used by lenders to determine loan eligibility, assess financial health, and identify potential risks associated with borrowing.
By calculating DSCR, businesses can measure their ability to meet debt payments, ensuring they have enough income after operating expenses to repay loans. A higher DSCR indicates strong financial stability, while a lower DSCR suggests a higher risk of default. Investors and lenders use this ratio to make informed decisions about creditworthiness and financial sustainability.
Formula for Debt Service Coverage Ratio Calculation
The formula used to calculate the Debt Service Coverage Ratio (DSCR) is:
DSCR = (Net Operating Income) ÷ (Total Debt Service)
Where:
Net Operating Income (NOI) = Total Revenue – Operating Expenses
Total Debt Service = Principal Repayments + Interest Payments
This formula helps determine how much income is available to cover debt payments. A DSCR of 1.0 means that income equals debt obligations, while a DSCR greater than 1.0 indicates a surplus, and a DSCR below 1.0 suggests insufficient income to meet debt commitments.
Debt Service Coverage Ratio Reference Table
To simplify financial assessment, the following table provides DSCR values based on different levels of net operating income and total debt service.
| Net Operating Income ($) | Total Debt Service ($) | DSCR | Financial Assessment |
|---|---|---|---|
| 50,000 | 50,000 | 1.0 | Break-even |
| 75,000 | 50,000 | 1.5 | Strong |
| 100,000 | 50,000 | 2.0 | Very Strong |
| 40,000 | 50,000 | 0.8 | High Risk |
| 30,000 | 50,000 | 0.6 | Critical Risk |
Lenders typically prefer a DSCR of 1.25 or higher, as it indicates a borrower has enough income to cover debt payments with a cushion for unexpected expenses. A DSCR below 1.0 is a warning sign that the borrower is not generating enough income to sustain debt obligations.
Example Calculation
A business generates an annual net operating income of $120,000 and has total debt service obligations (loan principal + interest payments) of $80,000.
Step 1: Apply the DSCR Formula
DSCR = 120,000 ÷ 80,000
Step 2: Compute the Result
DSCR = 1.5
This means the business earns 1.5 times its total debt service, indicating strong financial health. It also reassures lenders that the borrower has enough income to cover debt payments while maintaining operational stability.
Most Common FAQs
Lenders typically require a DSCR of at least 1.25 for loan approval. A DSCR below 1.0 is considered high risk because it indicates that the borrower does not generate enough income to cover debt obligations.
To improve DSCR, businesses can:
Increase revenue through sales growth or cost-cutting measures.
Reduce debt obligations by refinancing loans at lower interest rates.
Minimize operational expenses to boost net operating income.
Real estate investors use DSCR to determine if rental properties generate enough income to cover mortgage payments and expenses. A higher DSCR indicates a more profitable and stable investment property.