What is debt service coverage ratio (DSCR)?

Debt service coverage ratio measures whether a borrower generates enough cash to make its scheduled loan payments. The numerator is cash flow available for debt service, usually net operating income for commercial real estate or an EBITDA-based measure for operating companies. The denominator is total debt service, meaning scheduled principal and interest on all debt over the same period. A DSCR of 1.00x means cash flow exactly covers payments with nothing to spare.

Lenders use DSCR as a primary repayment test at underwriting and as a financial covenant after closing. Many commercial real estate and business loan policies set minimums in the range of 1.20x to 1.35x, with higher requirements for riskier property types or industries. Analysts typically calculate DSCR on historical results and on a projected basis that includes the proposed loan's debt service, and they often stress it for higher rates or lower income.

The most common pitfall is inconsistent definitions. Some calculations subtract unfinanced capital expenditures, taxes and owner distributions from EBITDA, while others do not, and the results can differ materially. Other errors include using interest-only payments when the loan will later amortize, omitting debt held at related entities or by guarantors, and relying on a single strong year. The loan agreement's covenant definition, not a generic formula, governs compliance testing.