Debt Service Coverage Ratio

The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a company's or an individual's ability to cover their debt obligations using their operating income. A DSCR above 1.0 indicates that there is sufficient income to service the debt, while a ratio below 1.0 suggests potential difficulty in meeting repayment obligations. It is commonly used by lenders and investors to assess financial health.

If a business generates $500,000 in annual net operating income and has $400,000 in annual debt payments, its DSCR would be 1.25, indicating it comfortably covers its obligations. Traders and investors analysing companies as part of a fundamental strategy may use DSCR to evaluate whether a business is financially stable or over-leveraged. A declining DSCR over time can be an early warning sign of financial distress, which may negatively impact the company's stock price or creditworthiness.