Debt Service Coverage Ratio (DSCR): Formula & Meaning

What the debt service coverage ratio (DSCR) is, the CFADS ÷ debt service formula, the covenants lenders require, and how to model it over a loan's life.

The debt service coverage ratio (DSCR) measures whether a business generates enough cash to cover its debt payments. It is the single most important ratio in project finance, real-estate lending and any leveraged deal, because it answers the lender's core question: will this borrower be able to pay? Here is the formula, what lenders require, and how to model it.

What DSCR is

DSCR compares the cash available to service debt against the debt payments due in the same period. A DSCR of 1.0 means the business generates exactly enough to cover principal and interest; below 1.0 it cannot; above 1.0 it has a cushion. Lenders lend against the ratio, not just against profit.

The DSCR formula

DSCR = Cash Flow Available for Debt Service (CFADS) ÷ Debt Service. CFADS is typically EBITDA less cash taxes, less the increase in working capital, less maintenance CAPEX — the cash genuinely available before financing. Debt service is scheduled principal plus interest for the period. Real-estate lenders often use net operating income as the numerator; the principle is identical.

What lenders require

Lenders set a minimum DSCR covenant — commonly 1.20x to 1.40x for corporate and real-estate loans, and higher for riskier projects — giving them a buffer if cash flow disappoints. Breaching it can trigger default even if payments are still being met, so a borrower's model must show DSCR staying comfortably above the covenant across the loan life, including in a downside case.

A worked example

A project generates $1.5m of CFADS in a year and owes $600,000 of interest plus $400,000 of principal — $1.0m of debt service. DSCR = $1.5m ÷ $1.0m = 1.5x, a healthy 50% cushion. If CFADS fell to $1.1m, DSCR would drop to 1.1x — below a typical 1.2x covenant, breaching the loan even though the business could technically still pay.

DSCR vs interest coverage

Interest coverage (EBIT ÷ interest) only tests the interest portion; DSCR is stricter because it includes principal repayment, the real cash obligation. For amortising loans, DSCR is the ratio that matters — a business can have comfortable interest coverage yet fail DSCR if principal repayments are heavy.

Model DSCR automatically

EasyFinancialModels builds a full debt schedule — drawdown, interest, principal and closing balance — and derives the cash available for debt service from the linked statements, so you can read DSCR by period and test it against a covenant. Use our cashflow forecasting model to check whether your cash flow covers debt service across the full loan life, free for up to 3 years.

→ Build your cash flow forecasting model free with the Cashflow Forecasting tool

More Cash Flow Forecasting guides

How to Build a Cash Flow Forecast in Excel (Free Template + Steps) · 13-Week Cash Flow Forecast: A Practical Guide for Tight Cash · Direct vs Indirect Cash Flow Forecasting: Which Method to Use · Cash Flow Forecasting for Startups: Runway, Burn Rate & When to Raise · Working Capital Days Explained: DSO, DIO & DPO and Why They Drive Cash

About the author

Every model is built and reviewed by the project's Financial Advisor — a Fellow Chartered Accountant (FCA), Chartered Global Management Accountant (CGMA) and Associate Chartered Management Accountant (ACMA) with around two decades of corporate finance, audit and accounting experience, designing investor-grade financial models across industries. Full credentials and background are available on LinkedIn. More about the author →

← All guides · WACC calculator · DCF calculator · IRR calculator · Inside the 15-sheet model