How do you calculate debt to service ratio?

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Debt Service Ratio and Debt Coverage Ratio mean the same thing.

To calculate,
  • Add back any interest expense to get 'Cashflow Available to Pay Debt'.
  • Divide Cashflow Available to Pay Debt' by the debt payments for the period.
  • An answer of 1.0 or better means there is just enough cashflow to cover the debt.
  • Most lenders want to see 1.2 to 1.3 for a business
Example:
Net Income for the year
$5,000 after a deduction of $10,000 interest expense.

Debt payments of $1,200 per month. ($1,200 x 12 =$14,400 per year)

Cashflow Available to pay Debt
$5,000 plus $10,000 equals $15,000.

Debt Service Ratio:
$15,000/$14,400
1.04

Probably not enough to keep the commercial lenders happy.


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