Debt-Service Coverage Ratio (DSCR)

  

A fancy way to see how easily a company's cash flows are covering their debt payments.

Cash flow is a measure of the way money is moving in and out of an organization. Positive cash flow indicates more money is coming in than is going out. Negative cash flow represents the opposite. Duh.

Meanwhile, any debt a company takes on needs to get serviced. Or paid. This might sound vaguely sleazy (imagine if we had said "a company needs to service its debt load"), but it just means that there's a cost to debt. "Interest" = "Rent." You need to pay back any debt you take on, plus interest. These payments spread out over a period of time (think of your mortgage payment as an example).

So the debt-service coverage ratio takes into account the company's cash flow and the total amount it needs to pay in order to service its debt. Specifically, it consists of the company's operating income (a measure of cash flow) and the debt-service charges. The number is typically given on an annual basis, meaning both numbers are given as the amounts earned or incurred over the course of a year.

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Finance: What is Debt?62 Views

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finance a la shmoop.. what is debt..well debt happens anytime you or anyone else

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or anything else borrows money and promises to pay it back countries borrow [Hands out looking to borrow cash]

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money from their citizens and from other countries

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Granny borrows money from the equity in her house to pay for her full body skin [Granny getting a full body skin procedure]

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lift procedure, ew! you'll probably borrow money to go to college buy a car

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and buy a home credit cards are golden or plastic

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tickets that let you easily borrow relatively small amounts of money to you

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know buy stuff so there are tons of types of debt and to really understand [lots of examples of debt]

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it all you have to think about debt from both sides of the equation that is you

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as the borrower want the most flexible payback terms the cheapest interest

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rates to rent that money and the least amount of grief if you're ever late on a

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payment but what if you're the lender well you only have so much money to lend [woman walking and approaches a vault of cash]

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and you want to maximize your returns while being smart about risk that is if

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you loan 10 grand to 10 people and 9 of them pay you a fat 10% a year but one of [woman at a stand giving loans to people]

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them absconds with your money to Brazil with senorita maracas well then

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all your work was for nothing more or less when the interest just paid back

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the lost principal on the one who absconded and yeah one bad loan can wipe

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out the returns of your entire portfolio your billion bucks was supposed to produce [Man falls in water while surfboarding]

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a hundred million in interest gains but when one of the ten hundred million

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dollar investments died and well you ended up sitting on a billion and that's

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it so no jet for you so would you loan money to your slacker friend Flaky McGee [Flaky McGee and Bill Gates together]

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for the same rent as you lend to Bill Gates while Flaky McGee has a history of

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you know flaking hence the name. so you'd have to take the risk of him [Flaky McGee in the kitchen with his Mom]

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not paying you and you'd have to track him down in Rio or get lawyers to take

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possession of the skateboard collateral he pledged for the loan and then sell it [Lawyers taking Flaky McGee's skateboard as collateral]

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on eBay and hopefully get most of your money back

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we'll go on record saying that you'll likely charge Flaky McGee a lot more in

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interest and make the terms and conditions much more brutal than you [Terms and conditions for Flaky's loan]

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would for dear old Bill well one big thing people don't seem to understand is

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that debt is just about someone renting money debt does not involve ownership of

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anything other than the promissory paper that contractually outlines the debt

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terms the only time debt does involve ownership is when the piece of paper has [Flaky sat on a toilet]

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been well you know made into toilet paper because the debtor flaked and

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didn't pay back the loan that they promised to pay at that point the one

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who loaned the money usually has every right to take back the collateral [Man drives car away from Flaky]

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pledged behind the debt and if that collateral can't be found to break knees

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you know the guys with the baseball bat remember? you ever see The Sopranos well so [Flaky screaming while on the toilet]

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if you ever find yourself in that position make sure to you know hide your

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knees

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