Debt Service Coverage Ratio compliance often is required or necessitated by covenants in a bank loan agreement. A bank loan covenant regarding the debt service coverage ratio will specify the amount of income a business and/or its guarantor must generate relative to the debt principal and interest payments on an annual basis to remain in compliance with the covenant. The business owner, or his or her CFO or Controller, should monitor this ratio carefully on a monthly basis so the covenant is not unintentionally broken.
How to Calculate Debt Service Coverage Ratio?
Download this free tool to help you to understand how to calculate debt service coverage ratio.
The DSCR Tool includes two pages in the workbook:
1. The first page is an Example to show how the Debt Service Coverage Ratio would be computed on a global basis for a business owner with multiple businesses.
2. The second page is where you will find a blank workbook with the formulas needed to compute Your Company’s Debt Service Coverage Ratio.
Note: You only need to enter financial information about your income, profit, depreciation, amortization, debt, and capital lease payments
Your bank loan documents likely will specify the income and adjustments permitted when calculating the debt service coverage ratio. Likewise, the debt components, such as principal, interest, and possibly capital leases, will be defined as well. To calculate your DSCR, you will need to enter the figures in the workbook cells which are yellow. The green cells in the workbook are formulas which will calculate the totals and the Debt Service Coverage Ratio automatically.
Once you have computed your ratio, compare it to the minimum ratio defined in your bank loan agreement.
Your ratio should equal or exceed the ratio which is defined by the bank. In the example, the ratio is 2.54 and would exceed the ratio most banks require which is approximately 1.25.