Cash / Debt Service Coverage Ratio

Cash / Debt Service Coverage is used to assess the liquidity of the enterprise in terms of cash flow. Operating, free and incoming cash flows can be used to carry out the estimation.

Alternative names of Cash/Debt Service Coverage:

  • DSC – Debt Security Ratio,
  • Interest Rate Indicator,
  • Capital Amount of Debt.
  • Cash / Debt Service Coverage,
  • In general, DSCR – Debt Service Coverage Ratio

What Does the Cash/Debt Service Coverage Show?

This ratio is an important indicator of the company’s financial position, since it evaluates the ability of the company to pay interest and a principal amount of the debt. The coefficient allows to get a more complete financial assessment than the Interest Coverage Ratio. The high value of the indicator means it will be easier for the company to obtain a loan in the future.

Formula of the Cash/Debt Service Coverage

CDSC = Operating cash flow / Payments of interest and principal

CDSC = (Operating cash flow + Interest payments + Income tax payments) / Total interest payments and income tax

CDSC = Free cash flow / Payments of interest and principal

Normative Value of the Cash/Debt Service Coverage

If the indicator’s value is below 1, it means the company’s debt costs exceed its income. Thus, any ratio that is less than 1, signals about a negative cash flow and certain financial problems. Creditors do not approve the negative cash flow, although they may agree to provide a loan in exceptional cases. In general, the normative value of the indicator should be above 2 and demonstrate a tendency to grow. The value of the indicator which is too high indicates that finances are not managed in the most optimal way.