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Debt-Service Coverage Ratio (DSCR) is a metric that shows the company’s cash flow available to pay debts and bills. Typically, DSCR is useful for corporates, personal finance, and even governments.
However, DSCR isn’t the easiest to calculate and can be a hassle for many business owners. Luckily, with the help of our Debt-Service Coverage Ratio calculator, you’ll be able to get accurate numbers in no time!
What Is Debt Service Coverage Ratio?
DSCR measures the company’s available cash flow, which can be used to pay debt obligations. The ratio compares the business’s total debt obligations to its operating income.
Generally, DSCR is essential to show investors whether your business has enough income to pay its bills. It’s also an indicator of the company’s financial health.
How to Calculate DSCR?
Here’s the formula of DSCR:
Debt service coverage ratio = Net Operating Income (NOI) / Total Debt Service
Therefore, to calculate DSCR, you need to find the value of NOI and the total debt service. The NOI is the company’s revenue minus Operating Expenses (OE). You can calculate NOI using this formula:
Net Operating Income = Revenue – OE
In addition, there’s another formula to calculate it:
NOI = (1−expenses) x (1−vacancy) x Gross Income
On the other hand, the total debt service is simply the current debt obligations or the monthly. You can calculate the total debt service using this formula:
Total Debt Service = Principle Repayment + Interest Payments + Lease Payments
DSCR Calculation Example
Let’s assume that a company has a total debt service of $65,000 and a net operating income of $100,000.
In that case,
DSCR = Net Operating Income (NOI) / Total Debt Service = $100,000 / $65,000 = 1.54
If you’re having trouble with the DSCR calculations, you can simply use Calcopolis. The website has a wide range of helpful tools and calculators.
What Is a Good DSCR?
Generally, a “good” DSCR is any value higher than 1.25. To add, a DSCR that’s lower than one could indicate that the business is facing financial issues.
However, a good DSCR value can vary from one industry to another. Overall, it depends on many factors, including market conditions, competitors, and the growth stage.
For example, a small business in its early stages will have a lower DSCR when compared to another mature competitor company. That’s because the small business is starting to generate cash flow while a mature company is already well established.
Typically, most lenders require a GSCR value of more than one. In fact, some lenders require a GSCR value of at least 1.25 to make a commercial loan.
Why Is DSCR Important?
DSCR is essential when it comes to negotiating loan contracts between companies and banks or lenders. So, DSCR calculation is useful for both lenders and businesses applying for loans.
In fact, it can help banks manage their risks. Further, DSCR comes in handy to investors and stakeholders when analyzing the business’s financial health.
Any company can calculate its monthly DSCR to monitor its financial performance. Further, a declining DSCR could be an early signal for financial problems.
In addition, it can come in handy in budgeting and strategic planning. On top of that, some companies use DSCR calculations from their competitors to analyze their performance.
If your company’s ratio is low, you might not be able to get a loan. In that case, you can improve your company’s DSCR or reduce the loan amount.
Improving Your Company’s DSCR
The following methods can come in handy to increase a company’s DSCR value:
Paying Off Current Debts
Paying off any existing debts will increase your company’s DSCR. That’s because the eliminated debt will no longer be part of the Total Debt Service in the equation.
You can increase your company’s DSCR by putting down a larger equity stake. On top of that, it can reflect your company’s commitment and dedication.
Cut Unnecessary Expenses
Cutting unnecessary can eventually improve the business’s DSCR. That’s because you’ll be increasing the NOI value by cutting expenses.
You should reevaluate your company’s expenses by checking what it’s paying and to whom. It’d also help you work on your negotiation skills and find better deals.