What is Debt Service Coverage Ratio (DSCR)?
The Debt Service Coverage Ratio (DSCR) is a solvency metric that measures a company’s capacity to service its debt from operating income. It is calculated as net operating income divided by total debt service (principal plus interest due in the period). A DSCR above 1.0 means operating cash flow covers debt obligations.
How It Works
- Compute net operating income (or EBITDA in many lending covenants) for the period.
- Sum all scheduled principal and interest payments due in the same period (total debt service).
- Divide net operating income by total debt service to obtain the DSCR.
- Compare against the lender’s minimum covenant (commonly 1.20 to 1.50).
- A ratio below 1.0 indicates insufficient income to cover debt and signals refinancing or distress risk.
Saudi Context
Saudi banks and SAMA-regulated lenders use DSCR as a core covenant in project finance, real estate, and SME term loans. Saudi Industrial Development Fund (SIDF) and the Real Estate Development Fund typically require a minimum DSCR of 1.25x to 1.50x. Tadawul-listed REITs disclose DSCR in their investor presentations as a leverage health indicator.
Example
A logistics firm in Dammam generates SAR 12 million in EBITDA. Its annual debt service (interest plus principal) is SAR 8 million. DSCR = 12 / 8 = 1.50x, meaning operating earnings cover debt obligations 1.5 times, comfortably above the lender’s 1.25x covenant.