Debt Service Coverage Ratio (DSCR)
The definition moves the number more than a bad year does. Say which one you used.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
The debt service coverage ratio (DSCR) divides the cash a business has available to pay its lenders by what it owes them in the same period — interest plus scheduled principal. Banks agree the numerator in the facility documents: EBITDA, EBITDA less tax, or cash left after the capital spending and distributions the business cannot avoid, and the same accounts give very different ratios on each. Below 1.0× the cash does not cover the payments. Fixed charge cover adds rent to both sides; global cash flow adds the owners and guarantors behind the loan.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// MAKE THE CALL
Issue 05 — Meridian Logistics. One customer is now 58% of revenue — and the expansion request is for assets dedicated to that customer. The contract has a 90-day break clause. Your call first, then the senior banker's.
// ONE RATIO, FOUR DEFINITIONS
Every coverage ratio has the same shape: the cash a business can use to pay its lenders, over what it owes them in the period. The denominator is rarely argued about — interest plus the principal due on schedule. The numerator is where banks, policies and facility agreements differ, and it is written into the documents for that reason.
| Dimension | WHAT IS DIVIDED | WHEN A DESK USES IT |
|---|---|---|
| EBITDA ÷ DEBT SERVICE | WHAT IS DIVIDEDEarnings before interest, tax and depreciation over interest plus scheduled principal. | WHEN A DESK USES ITA quick first look, or where the documents define it this way. The most generous of the four. |
| EBITDA LESS TAX ÷ DEBT SERVICE | WHAT IS DIVIDEDThe same, with tax paid taken out first — tax is paid before lenders are. | WHEN A DESK USES ITThe common working definition in a credit paper. |
| CASH AVAILABLE ÷ DEBT SERVICE | WHAT IS DIVIDEDAfter tax, the capital spending the business needs just to stand still, and what the owners take out. | WHEN A DESK USES ITAsset-heavy businesses and owner-managed ones, where capex and drawings are not optional. |
| FIXED CHARGE COVER | WHAT IS DIVIDEDRent and lease payments added to both sides, as a fixed charge like interest. | WHEN A DESK USES ITRetailers, carriers and anyone whose premises or fleet are leased. |
// 01 — THREE ANSWERS FROM ONE YEAR
Take Highview Industries' FY25, the clean file in Issue 04. Interest was US$0.64m and scheduled principal US$0.80m: debt service of US$1.44m. Divide three numerators by it:
less tax US$0.79m: US$3.92m ÷ US$1.44m = 2.72×
less capex US$1.10m and dividends US$0.70m: US$2.12m ÷ US$1.44m = 1.47×
The same company in the same year covers its debt service 3.27×, 2.72× or 1.47×, depending on what the reader decided to count. None of the three is wrong; each answers a different question. The first asks what the business earns; the second what is left after the tax authority; the third what is left after the business has kept itself running and paid its owners. A covenant set on one and tested on another is a dispute waiting for a bad year — which is why the credit paper states its definition beside every ratio.
// 02 — THE RATIO ON THE NEW DEBT
A DSCR is most useful looking forward, on the debt that is being asked for. Meridian Logistics, in Issue 05, has no debt today and wants US$6.0m: trucks that can be repaid over five years and a distribution-centre fit-out that should be gone inside three. At an assumed 7.5%, the first year's debt service is about US$1.85m — US$1.40m of principal and US$0.45m of interest. FY25 EBITDA less tax was US$3.63m:
Comfortable, on the year just closed. But 58% of that revenue comes from one customer whose contract can end on ninety days' notice. If it did, the US$21.8m of revenue that remains, at the same 8.2% margin, earns about US$1.79m of EBITDA before tax — 0.97× of the new debt service, and that is before the dedicated costs that do not leave on day ninety. The ratio describes the contract, not the business. That is why the senior read in Issue 05 is about structure rather than coverage: the generic trucks funded normally, the fit-out that only this customer needs paid off inside the period the break clause puts at risk.
// 03 — WHEN RENT IS DEBT: FIXED CHARGE COVER
Kowhai Retail Group, in Issue 06, owes the bank almost nothing at year-end: its seasonal line is cleaned down every February. On bank interest alone its cover looks enormous. But fourteen stores are leased, and the rent — US$2.60m in FY25 — has to be paid whether Christmas sells or not. Fixed charge cover puts it on both sides:
FY25 interest cover US$1.26m ÷ US$0.15m = 8.40× · fixed charge cover (US$1.26m + US$2.60m) ÷ (US$0.15m + US$2.60m) = 1.40×
Interest cover says the bank is barely exposed. Fixed charge cover says the business had 1.40× of earnings for every dollar of commitments it could not walk away from, after a season that did not clear. Give back the same 5 points of margin in a second season and it falls to 0.84×: below the line where earnings cover the commitments at all. The seasonal line sits on top of those commitments, which is why the senior read in Issue 06 funds last year's true peak and leaves the rest of the uplift to the shareholders or to evidence.
// 04 — GLOBAL CASH FLOW, AND ITS OPPOSITE
For an owner-managed business the company's cash and the owner's are drawn from the same well. Global cash flow analysis adds them up: the business's cash available, the owners' other income, less their drawings, personal borrowing and anything they have guaranteed elsewhere, against every debt the group owes. It is the test of whether the people standing behind a loan can actually stand behind it.
Sometimes the useful move runs the other way. Issue 03 is a dairy family splitting two farms between two successors. Combined, the business carried its NZ$13.0m of term debt at 2.4× interest cover, with the patriarch's guarantee over all of it. The senior read declines to rely on that combined picture: it underwrites each successor's entity on its own, stressed at a NZ$6.50 payout, and releases the guarantee only as each one proves it can stand without the other. A global number can hide the part that cannot pay; taking the group apart is how a desk finds it.
// 05 — WHAT THE RATIO CANNOT SEE
A coverage ratio is an annual average of cash against an annual total of payments. It does not see the month the season peaks, the customer who can leave, or whether the earnings on top of the fraction are real. A covenant tested on reported EBITDA inherits every choice made in producing it — the provision released, the costs capitalised, the income pulled forward — which is exactly the trap in Issue 07, where the covenants were clean because the profit was flattered.
// STANDARDS THIS SITS BESIDE
The recognised ground this page sits beside. Each was opened and checked when cited; none is a source for the framework itself.
- OCC, Comptroller's Handbook: Commercial Real Estate Lending, Version 2.0 (March 2022) — debt service coverage ratio, page 43 — Defines DSCR as net operating income over annual debt service, and says the appropriate level depends on the amortisation period and how volatile the cash flow is — the reason this page gives no single number.
- Board of Governors of the Federal Reserve System, Commercial Bank Examination Manual, section 2080.1 Commercial and Industrial Loans, page 10 — Treats cash flow as the most important element in judging ability to repay, and defines the coverage ratio as cash flow before debt service over principal and interest — section 01 on this page.
- OCC, Comptroller's Handbook: Lending and Loan Portfolio Risk Management, Version 1.0 (2026) — glossary, fixed charge coverage ratio, page 130 — Defines fixed charge coverage as a measure of the ability to meet recurring fixed charges: cash flow divided by fixed charges — section 03 on this page.
- Board, FDIC, NCUA and OCC, Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts (June 2023), section IV and footnote 17 — Describes global debt service coverage as the combined cash flows and combined obligations, contingent ones included, of the borrower and the guarantor — section 04 on this page.
// QUESTIONS PEOPLE ASK
- How do you calculate the debt service coverage ratio?
- Divide the cash a business has available to pay its debts by the payments due on them over the same period — interest plus scheduled principal. The numerator is where banks differ: some use EBITDA, some EBITDA less tax, some deduct the capital spending needed to keep the business running and the owners' distributions as well. The facility documents define it, and the same accounts can produce very different ratios on different definitions, so a DSCR is only meaningful with its definition beside it.
- What is a good DSCR?
- There is no single number. A bank sets a minimum in its credit policy and writes one into each facility's covenants, and both depend on how stable the cash flow is, how quickly the debt amortises and how the ratio is defined. What every definition shares is the line at 1.0×: below it, the cash available does not cover the payments due. This site does not publish a benchmark band, because a band quoted without its definition misleads more readers than it helps.
- What is the difference between DSCR and interest cover?
- Interest cover compares earnings with interest only; DSCR compares cash available with interest and the principal repayments due. A business repaying debt quickly can have comfortable interest cover and a tight DSCR, because the principal is the larger payment. Lenders to businesses with amortising term debt watch DSCR for that reason; interest cover suits facilities that are not being repaid on a schedule.
- What is the fixed charge coverage ratio (FCCR)?
- A coverage ratio that counts other fixed commitments alongside debt service — most often rent and lease payments — on both sides of the fraction. For a retailer or any business that leases its premises, rent is as unavoidable as interest, and a ratio that leaves it out can make a business with heavy lease commitments look far safer than it is.
- What is global cash flow analysis?
- An assessment of whether the borrower and the people or entities standing behind it — guarantors, related companies, the owners' own commitments — can together meet all their debts, not just the loan in question. It matters most for owner-managed businesses, where the owner's drawings and personal borrowing come out of the same cash as the business's debt service.
// THE ACCOUNTS BEHIND EVERY NUMBER HERE
Each figure on this page comes from the file appendix published with its drill — three years of profit and loss, balance sheet and cash flow, open above the question.
Open Issue 05's file →