DSCR
What the DSCR tells you, how to calculate it, and the value your bank expects.
Create your financial plan
What the DSCR tells you, how to calculate it, and the value your bank expects.
Create your financial planThe Debt Service Coverage Ratio (DSCR) is the central metric in corporate credit assessment. It shows whether a company can service its debt from ongoing operations. Debt service is the sum of interest and principal for a period. The DSCR compares it against the cash flow available before that burden, the cash flow before debt service.
For the bank, the DSCR is the gauge of default risk. The higher the coverage, the safer the loan and the better the terms. A value of 1.0 means cash flow covers debt service exactly. Anything above is a safety buffer, anything below a coverage gap.
Here is how the calculation builds up for one plan year, from revenue down to the cash flow available for debt service:
| Revenue | 1,500,000 € |
| − Cost of materials / COGS | 600,000 € |
| − Personnel expenses | 450,000 € |
| − Other operating expenses | 225,000 € |
| = EBITDA | 225,000 € |
| − Depreciation | 55,000 € |
| − Interest | 20,000 € |
| = Earnings before taxes | 150,000 € |
| − Income taxes (30%) | 45,000 € |
| = Net income | 105,000 € |
| + Depreciation (non-cash) | 55,000 € |
| + Interest | 20,000 € |
| = Cash flow before debt service | 180,000 € |
Interest and depreciation appear twice on purpose: first they reduce taxable profit, which is where the tax shield of debt financing takes effect. Then they are added back, because the DSCR measures cash flow before the entire debt service. Depreciation counts here because it is non-cash.
You then compare this cash flow separately against the debt service, the sum of interest and principal. Their ratio is the DSCR:
| Cash flow before debt service | 180,000 € |
| Debt service (interest 20,000 + principal 62,000) | 82,000 € |
| DSCR | 2.2 |
A DSCR of 2.2 means the company earns more than twice its debt service and sits well in the green zone. The near-universal minimum banks look for is 1.2. It varies slightly by sector: for stable cash flows such as rented real estate, 1.1 to 1.2 can be enough, while for volatile models banks tend to expect 1.3 or more.
Planvik computes the DSCR for every plan year automatically from your inputs, per loan and consolidated across all liabilities. The result is a bank-ready Excel financial model, with no manual formulas.
Create your financial planThe DSCR is often confused with the Interest Coverage Ratio. The ICR relates EBIT to interest expense alone and thus measures only how comfortably interest is earned. The DSCR also includes principal repayment. Because a loan is ultimately repaid and not just serviced with interest, the DSCR is the stricter and more meaningful metric for banks.
If the DSCR falls below the critical mark of 1.2, there are essentially four levers. The most sustainable is a higher operating cash flow, through better margins, more volume or lower costs. In the short term, stretching the repayment helps: repaying a 500,000 euro loan over fifteen years instead of ten cuts the annual principal from 50,000 to around 33,000 euros. A grace period frees up the first one or two years, with interest only, which makes sense when a project needs time to ramp up. And more equity reduces the loan amount, lowering interest and principal at once.
Banks rarely look at the DSCR as a single value. They usually check two figures: the minimum DSCR, the weakest value in the projection period, which often falls in the first or second year after an investment, and the average across all plan years. Both should be above 1.2, with the average ideally above 1.5.
A coverage gap: current cash flow is not enough to fully service interest and principal. The shortfall would have to come from reserves, equity or new funds. Without additional collateral, banks usually decline.
Usually after taxes. Income taxes are a real cash outflow and reduce the cash flow available for debt service.
The DSCR is a ratio. Debt service capacity is a euro amount: the maximum debt service a company can carry after owner withdrawals and replacement investments. Both measure the same ability from two angles.
The principle applies everywhere, only the required level varies. For stable cash flows such as rented real estate, banks may accept 1.1 to 1.2, for volatile business models rather 1.3 or more.
Planvik computes the DSCR for every plan year automatically from the projected P&L and the cash flow statement. The numerator is cash flow before debt service, the denominator is interest plus principal from the amortization schedules. No manual formula is needed.
Yes. Planvik reports the DSCR per loan and consolidated across all liabilities, plus the minimum DSCR and the average over the entire projection period.