What ratio compares net operating income to total debt service?

What ratio compares net operating income to total debt service? The debt service coverage ratio. Usually abbreviated DSCR, it measures whether an entity generates enough operating income to meet required debt payments.

The basic formula is net operating income divided by total debt service. Depending on the context, debt service can include interest, scheduled principal repayment, and lease payments. Net operating income is intended to represent operating performance before financing costs, rather than profit after interest and taxes.

A DSCR of 1.0 means income exactly covers the measured debt service. A figure below 1.0 signals a shortfall, while a figure above 1.0 indicates some coverage cushion. Commercial-property lenders often look for roughly 1.25, meaning income is 25% greater than annual debt service, although requirements vary by lender and loan.

The ratio is not the same as interest coverage, which focuses primarily on interest expense. Nor is it operating leverage, which describes the sensitivity of operating profit to changes in sales. Exact DSCR definitions can differ across corporate, real-estate, project-finance, and personal-finance settings.