debt coverage ratio


Also found in: Acronyms.

Debt-Service Coverage Ratio

1. In investment real estate, the ratio of annual net operating income on a piece of investment property to its annual debt service. Banks use the DSCR to help determine whether to make or refinance loans for investment property. A DSCR equal to or greater than 1 indicates that the debtor is able to service the debt on the income from the investment property. In personal finance, banks usually require a DSCR of at least 1 to make such a loan, while they generally expect a ratio of 1.2 for commercial projects.

2. In government finance, the ratio of annual export earnings to its annual debt service on external debt.

debt coverage ratio (DCR)

The ratio of net operating income compared to annual debt service, which includes principal and interest payments. The ratio is used by lenders to evaluate loans on income-producing property.A ratio of 1.2 or better will usually support the extension of credit.

Example:

Annual revenues $100,000

– Annual operating expenses 50,000

 Net operating income 50,000

Annual debt service on proposed loan 11,000

$50,000 ÷ $11,000 = DCR of 4.54

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