DSCR stands for Debt Service Coverage Ratio, which is a financial metric used to assess an entitys ability to generate enough cash to cover its debt service obligations. Debt service refers to the cash needed to pay the required principal and interest of a loan during a given period. DSCR is calculated by dividing net operating income by debt service, including principal and interest.

DSCR is used in various contexts, including corporate finance, personal finance, and commercial real estate finance. In corporate finance, DSCR refers to the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments. In personal finance, DSCR is used by bank loan officers in determining debt servicing ability. In commercial real estate finance, DSCR is the primary measure to determine if a property will be able to sustain its debt based on cash flow.

A DSCR over 1 means that the entity generates sufficient cash flow to pay its debt obligations, while a DSCR below 1.0 indicates that there is not enough cash flow to cover loan payments. In certain industries where non-recourse project finance is used, a Debt Service Reserve Account is commonly used to ensure that loan repayment can be met even in periods with DSCR<1.0.

DSCR is a commonly used metric when negotiating loan contracts between companies and banks. For instance, a business applying for a line of credit might be obligated to ensure that their DSCR does not dip below 1.25. If it does, the borrower could be found to have defaulted on the loan. In addition to helping banks manage their risks, DSCRs can also help analysts and investors when analyzing a company’s financial strength.