What is DSCR?
The Debt Service Coverage Ratio (DSCR) is a financial ratio used
to measure a company’s ability to service its debt—that is, to pay both
interest and principal repayments—out of its operating income.
It answers the question:
"Can the company comfortably meet its debt obligations with the
income it's generating?"
The DSCR Formula
DSCR = Net Operating Income / Debt Service
Where:
• Net Operating Income = EBIT or EBITDA
• Debt Service = Interest + Principal Repayment
Note: Higher DSCR = Safer for lenders
Example Calculation
• NOI = ₹12,00,000
• Interest = ₹2,00,000
• Principal = ₹4,00,000
• Debt Service = ₹6,00,000
• So, DSCR = NOI / Debt Service
= 12,00,000
6,00,000
= 2.00
Company earns 2 times its debt obligations
How to Interpret DSCR
DSCR Value Meaning
< 1.0 Risky – Insufficient income
= 1.0 Just enough to repay debt
> 1.0 Safe – Comfortable cushion
1.25 to 2.0 Ideal DSCR for business loans:
What is Interest Service Coverage Ratio?
The Interest Service Coverage Ratio (ISCR) is a financial metric
that helps assess a company's ability to pay interest on its outstanding
debt. It's especially important for lenders and investors to gauge how
comfortably a business can handle its debt obligations.
The ICR Formula
Interest Service Coverage Ratio (ISCR)
= EBIT / Interest Expense
EBIT = Earnings Before Interest and Taxes
Interest Expense = The interest payable on debt during a period
Example Calculation
Let’s say a company has:
EBIT = ₹10,00,000
Interest Expense = ₹2,50,000
So, ISCR
=10,00,000 / 2,50,000
=4
This means the company earns 4 times the amount
needed to pay interest — very healthy.
How to Interpret ICR
ICR Value Meaning
Red flag (company isn’t earning enough
< 1.0
to pay interest)
= 1.0 Just enough to repay interest
Better (company is more financially
> 1.0
stable)
University Paper 2024
• A company will launch new product with life of 3 years.
• All units produced are sold in same year.
• Sales quantity for year 1 is 10000 units which will increase by 1000 per year.
• Selling price for year 1 is 210 and it will increase by 7 per year.
• Operating cost per unit for year 1 is 23 which will increase by 2 per unit.
• Project is financed by Equity 12 lakhs and Term loan 12 lakh which carries interest
rate 8% per year and loan is to be repaid in 3 years by Equal Annual Installment.
• Interest for the year will be charged on opening balance of loan of that year.
• The project assets are land 2 lakh and depreciable fixed assets 22 lakhs.
• Depreciation is charged at 20% per year by written down value method.
• Income Tax is 35%.
• Calculate Debt Service Coverage Ratio (DSCR) and Interest Coverage
Ratio (ICR) for all years.
Sales Sale Price Operating Cost Operating
Year Sales EBDITA
Qty Per Unit Per Unit Cost
1 10,000 210 21,00,000 23 2,30,000 18,70,000
2 11,000 217 23,87,000 25 2,75,000 21,12,000
3 12,000 224 26,88,000 27 3,24,000 23,64,000
EBDITA Depreciation EBIT Interest PBT Tax PAT
18,70,000 4,40,000 14,30,000 96,000.00 13,34,000 4,66,900 8,67,100
21,12,000 3,52,000 17,60,000 66,429.00 16,93,571 5,92,750 11,00,821
23,64,000 2,81,600 20,82,400 34,492.00 20,47,908 7,16,768 13,31,140
PAT + Depreciation + ICR =
PAT EMI DSCR
Interest EBIT / Interest
8,67,100 14,03,100 4,65,640.00 3.01 14.90
11,00,821 15,19,250 4,65,640.00 3.26 26.49
13,31,140 16,47,232 4,65,640.00 3.54 60.37
ICR for 3 years are 14.38, 25.67 and
58.63
DSCR for 3 years 2.94, 3.19 and 3.45
