DSCR (debt service coverage ratio)
DSCR (Debt Service Coverage Ratio)
The debt service coverage ratio measures whether a borrower generates enough cash flow to cover its debt payments. It's calculated as net operating income divided by total debt service (principal plus interest due over a period). A DSCR of 1.0 means the borrower produces exactly enough cash to meet its obligations, with nothing to spare. Above 1.0 means a cushion; below 1.0 means the borrower isn't generating enough to service its debt and is drawing on reserves, refinancing, or heading toward distress.
DSCR is one of the most-watched metrics in cash-flow-based lending, commercial real estate, project finance, and any deal where repayment comes from an asset's operating income rather than from liquidating collateral. A lender typically requires a minimum DSCR (say, 1.25x) at underwriting, meaning the borrower must generate 25% more cash than the debt strictly requires, as a buffer against revenue shortfalls.
The ratio is also a live monitoring tool, not just an underwriting gate. A DSCR that's trending down over successive periods signals deteriorating ability to pay, often well before an actual missed payment, which makes it an early-warning indicator lenders track continuously through the life of a loan.