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Explain Debt Service Coverage Ratio. What does it indicate?
Debt Service Coverage Ratio (DSCR) is one of the most important ratios calculated by the financial institutions or Bankers giving long term finance to the organization. This ratio is calculated to ascertain the capability of the organization to repay the dues arising as a result of long term borrowings. It is an index of the financial strength of an enterprise. It is very important tool from lender’s point of view. A high debt service ratio assures the lenders a regular and periodical interest income. Too low DSCR indicates insufficient earning capacity of the organizations to meet the obligations of long term borrowings which may create some problems to the financial manager in raising funds.
Formula to calculate DSCR = (Net profit after taxes + Depreciation + Interest on term loans)/ (Interest on term loans + Installment on term loans)
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