Debt service coverage ratio
A ratio lenders use to test whether a business's cash flow covers its debt payments for a period.
Lenders calculate this ratio from a business’s financial statements, dividing available cash flow by total debt payments. Debt payments include principal and interest on existing loans and on any new loan you request. Cash flow is often approximated as net income plus depreciation, amortization, and interest.
A result above 1.0 means your cash flow exceeds the required payments. A figure below 1.0 indicates it does not. Lenders set their own minimum thresholds and define cash flow differently. Loan agreements may also require you to maintain this ratio above a specific level.
The result shows how a lender may view the business’s ability to service debt.
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Information only, not financial, tax, legal, or investment advice, and not an assurance engagement. Full disclaimer.