BizSugar.com › Finance › What is a Debt Service Coverage Ratio?

The debt service coverage ratio is a measurement used by lenders to determine if a business is able to meet its debt servicing obligations through its operating income during a given period of time. In most cases, a lender wants the operating income to exceed the debt servicing costs by some measure. This ratio defines the extent to which a business’s operating income (or other defined measure of cash flow) exceeds the cost to service its bank loans.

Debt servicing is the summation of the loan principal and interest (or cost of capital), and sometimes lease payments, paid to a lender and others on an annual basis.

The debt service coverage ratio is determined by comparing the business’s operating income (or other defined measure of cash flow) to the debt service costs during a given period of time.