The Debt-Service Coverage Ratio (DSCR) assesses a company's ability to pay its debt using cash flow. It's calculated by dividing net operating income by total debt service, including principal and interest. This ratio shows if a company earns enough to cover its debt obligation.
Lenders use this ratio to assess a borrower's financial health and determine loan eligibility. A DSCR above 1 indicates positive cash flow, with higher values suggesting stronger financial stability. Conversely, ratios below 1 signify potential financial strain, prompting lenders to impose stricter terms or reject loan applications altogether. Understanding and maintaining a favorable DSCR is essential for businesses seeking financial stability and growth.