Define debt-service coverage ratio (DSCR) and its interpretation.

Define debt-service coverage ratio (DSCR) and its interpretation.

• A. DSCR = net operating income / debt service; >1 indicates ability to cover debt payments.
• B. DSCR = total assets / total liabilities.
• C. DSCR = gross revenue / debt service.
• D. DSCR = net income / debt service.

Answer: (A)

DSCR shows whether the cash generated from operations can cover debt payments. It compares the cash flow available to service debt (net operating income) to the amount due for debt service (principal and interest) in a period. If the ratio is above 1, there’s more than enough cash to cover debt payments, giving a cushion and signaling lower default risk. If it equals 1, income just meets the payments with no margin for surprises; if it’s below 1, there isn’t enough cash to cover debt service without dipping into reserves or other funds. Numbers are usually on an annual basis, and NOI focuses on operating performance (excluding financing and taxes) while debt service reflects the loan obligations. Lenders often require a minimum DSCR (for example, around 1.2x or higher) to approve financing. For instance, an annual NOI of 120,000 with debt service of 100,000 gives a DSCR of 1.2, a comfortable cushion; if debt service is 150,000, the DSCR is 0.8, indicating insufficient cash to meet obligations.

DSCR shows whether the cash generated from operations can cover debt payments. It compares the cash flow available to service debt (net operating income) to the amount due for debt service (principal and interest) in a period. If the ratio is above 1, there’s more than enough cash to cover debt payments, giving a cushion and signaling lower default risk. If it equals 1, income just meets the payments with no margin for surprises; if it’s below 1, there isn’t enough cash to cover debt service without dipping into reserves or other funds. Numbers are usually on an annual basis, and NOI focuses on operating performance (excluding financing and taxes) while debt service reflects the loan obligations. Lenders often require a minimum DSCR (for example, around 1.2x or higher) to approve financing. For instance, an annual NOI of 120,000 with debt service of 100,000 gives a DSCR of 1.2, a comfortable cushion; if debt service is 150,000, the DSCR is 0.8, indicating insufficient cash to meet obligations.