Plain definition
Debt service coverage ratio, usually called DSCR, compares cash available for debt service with the principal and interest that must be paid during a stated period. It answers a different question from interest coverage: interest coverage asks whether earnings cover interest; DSCR asks whether the defined cash measure covers the full scheduled debt service.
The exact numerator is contractual. One lender may use a defined cash-flow measure, another may add or exclude taxes, capital expenditure, distributions, or exceptional items. The testing period, payment dates, and minimum ratio also come from the agreement.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
For example, using the loan agreement’s definition, forecast cash available for debt service for the year is . Scheduled principal is and interest is , so total debt service is . DSCR is 2.0 times: divided by .
That result does not mean is free to spend. It means that, under this particular definition and period, the company has twice the cash measure required to cover the scheduled debt payments. A delay in collections or an unplanned capital payment could change the result before the next test date.
| Defined cash available for debt service | |
|---|---|
| Scheduled principal and interest | |
| DSCR |
Do not calculate a covenant result from a generic internet formula when the signed agreement defines the measure differently.
Why it matters
A founder may see a profitable month and assume debt is affordable, while principal repayments and cash timing create a different result. DSCR exposes that difference before a breach, a refinancing problem, or a request for a waiver.
Practical consequence
Read the financing agreement and copy its numerator, denominator, period, threshold, testing date, and cure provisions into the forecast model. Link the model to the repayment schedule, not to a single annual interest estimate.
Stress-test the few events most likely to reduce the cash measure, such as a delayed collection, margin fall, or capital payment. If headroom narrows, decide early whether to improve operations, preserve cash, seek a waiver, or arrange replacement funding.