The Debt Service Coverage Ratio measures whether a business generates enough operating income to cover its debt obligations, including principal and interest.
DSCR divides the net operating income available to service debt by the total of all principal and interest payments due in a period. A ratio above 1.0 means the business generates enough to cover its obligations; below 1.0 means it does not.
DSCR answers the question: does this business earn enough to pay its debts? A ratio of 1.5 means the business earns ₹1.50 for every ₹1.00 of debt payment required.
A business has net operating income of ₹30 lakh annually. Annual debt service, including principal and interest, is ₹20 lakh. DSCR is 1.5. The business generates fifty percent more than required, providing a buffer for difficult periods.
Revenue ₹100 lakh minus operating expenses ₹70 lakh equals net operating income of ₹30 lakh. Total debt service: interest ₹8 lakh plus principal repayment ₹12 lakh equals ₹20 lakh. DSCR: 30 ÷ 20 = 1.5x.
Lenders typically require minimum DSCR levels of 1.2 to 1.25 for new loans. Lower ratios suggest stress; ratios consistently below 1.0 indicate the business cannot service its debt from operations.
Before taking on debt, a business should model DSCR across different scenarios including downside cases. Understanding the minimum DSCR a business can tolerate and what events might cause it to fall below that level is critical to responsible borrowing.