October 07, 2025
4 mins read
If a business borrows money, it needs to show it can pay it back. That’s where the Debt-Service Coverage Ratio, or DSCR, comes into play. It’s a simple way to check whether a company earns enough to meet its loan payments.
Whether you’re running a company or reviewing one, DSCR gives you a clear idea of whether the finances are strong enough to handle debt repayments — without running into trouble.
The DSCR compares how much a business earns with how much it owes in loan payments. It’s usually looked at over a year and includes both the interest and principal amounts due.
Here’s the basic formula:
DSCR = Net Operating Income ÷ Total Debt Payments
Net operating income means what’s left after covering everyday business costs, but before paying interest and taxes. Total debt payments include everything the business needs to repay on loans — not just interest.
If the DSCR is:
Above 1: The business earns more than it needs to repay
Exactly 1: It breaks even on repayments
Below 1: It may not earn enough to cover what it owes
Let’s take a look at how this works in real numbers.
Example 1:
A business earns ₹15 lakh in a year after operating costs. Its loan repayment (interest + principal) totals ₹12 lakh.
DSCR = ₹15,00,000 ÷ ₹12,00,000 = 1.25
This means the company has 25% more income than needed — a healthy sign.
Example 2:
Another business earns ₹6 lakh but owes ₹8 lakh in the same period.
DSCR = ₹6,00,000 ÷ ₹8,00,000 = 0.75
That’s a red flag. The business doesn’t generate enough income to pay off its loans.
These examples show why the DSCR is so important — it quickly highlights whether a company is managing its debt well.
Easy to calculate and understand
Trusted by lenders to check loan eligibility
Helps businesses keep track of their financial health
Can guide future borrowing decisions
Doesn’t reflect short-term cash issues
One-time income spikes can give a false impression
Doesn’t account for upcoming financial changes
May not suit seasonal businesses without adjustments
So while the DSCR is useful, it works best when looked at with other financial indicators.
Here’s how you can work it out step by step:
Find the Net Operating Income
This is what the company earns after day-to-day running costs — but before paying interest and tax.
Calculate the Total Debt Service
Add up all loan repayments due for the year. This includes both principal and interest.
Apply the formula
DSCR = Net Operating Income ÷ Total Debt Service
Example:
Let’s say the company earns ₹20 lakh after expenses. Its total loan repayment is ₹15 lakh.
DSCR = ₹20,00,000 ÷ ₹15,00,000 = 1.33
So, the business earns 33% more than it owes — which is reassuring for any lender.
Additional Read: What is Asset Coverage Ratio
For banks and financial institutions, the DSCR is one of the first things they check before approving a loan. It shows how comfortably a borrower can meet their repayment schedule.
In India, many lenders prefer a DSCR of 1.2 or higher. That extra cushion helps protect against future dips in income.
But it’s not just for lenders. Businesses also use the DSCR to track their debt-handling capacity and plan ahead. If the ratio starts slipping, it’s a warning to cut back or find ways to increase earnings.
Regulators like the RBI may also look at DSCR trends when analysing the health of certain sectors, especially in infrastructure or real estate.
Managing debt isn’t just about paying on time — it’s about knowing whether you’ll be able to continue doing that in the future. That’s what DSCR helps with.
It’s a straightforward ratio, but it gives valuable insight into whether a company’s income can support its borrowing. And while no single number tells the full story, a solid DSCR is a strong starting point in any financial assessment.
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It means the business makes 25% more than it needs to cover its debt payments — a sign of financial comfort.
Most lenders prefer a DSCR of 1.2 or more. It shows the business has a little extra income beyond what it owes.
It’s a metric that tells how easily a company can pay just the interest on its loans, using its operating profit.
DSCR covers both interest and principal repayments. Interest coverage ratio looks only at interest, so DSCR gives a fuller picture.
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