Question
The Debt Service Coverage Ratio (DSCR) is a key metric
used by lenders to assess a company's ability to service its debt. It is calculated as:Solution
DSCR measures the number of times a company's cash flow can cover its total debt service obligations. The numerator needs to represent the cash profit available. Since Net Profit is after depreciation (a non-cash expense) and interest, we add them back. So, Net Profit + Depreciation + non-cash charges + Interest gives a proxy for cash profit. The denominator is the total debt obligation for the period, which includes both Interest + Principal Repayment. Option C is the Interest Coverage Ratio, Option D is the Current Ratio, and Option E is the Debt-to-Equity Ratio.
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