What is Debt Service Coverage Ratio?
The debt service coverage ratio (DSCR) measures a company’s ability to pay its debt obligations from its operating cash flow. It is calculated by dividing net operating income by total debt service for the period.
How It Works
- Determine net operating income or EBITDA for the period.
- Add back any non-cash items if the lender’s definition requires it.
- Identify total debt service — principal and interest due in the same period.
- Compute DSCR = net operating income ÷ debt service.
- Benchmark the result against the lender’s covenant or industry minimum.
Saudi Context
Saudi banks regulated by SAMA typically require a DSCR of 1.20× to 1.50× on corporate loans, and SIDF tracks DSCR closely on industrial project financings. Real estate developers funded under SREDF programs see DSCR covenants in their facility documents.
Example
A company generates SAR 6M of net operating income and faces SAR 4M in principal and interest payments. DSCR = 6 ÷ 4 = 1.50× — within the typical covenant range.