Debt Service Coverage Ratio

Debt Service Coverage ratio is a financial term that means the total amount of cash flow that is available to pay off the annual interest and principle payments accumulated on business debt within a certain accounting period. This amount of cash flow also included amount required to pay the sinking fund of the business.

If we analyze this term with respect to government perspective we will came to know that it is the amount of cash flow resulting from export earnings that is required by a government to pay annual interest and principle payments on the debt taken by the country in that accounting year.

If we analyze this term with respect to personal finance we will find out that it is the amount that is used by bank loans officers to in determining the income property loans for the individual. The formula of Debt Service Coverage Ratio can be presented as under:-

Debt Service Coverage Ratio = Net Operating Income/ Total Debt Service

If the value of the ratio is less than one that means there is a negative cash flow. A value of 0.95 of the Debt Service Coverage Ratio means that a business has cash flow that will cover only 95 percent of its annual debt and interests. Most of the investors, borrowers and credit granting companies frown on a negative value of debt service coverage ratio however some investors and credit company don’t give it more importance if they know that the borrower has a strong source of outside income.

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