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The interest expense is accounted for in the income statement. This is done on an accrual basis, so there may actually be interest on the income statement that has not actually been paid from cash flow to date as one reason. Secondly, the debts obtained from a credit bureau shows full principle and interest payments being serviced. If the interest expense found on the income statement is not added back, then the lender would be double counting the interest being paid on the loans (once from the income statement and once from the credit bureau). This double counting of interest payments could keep a deal that should be approved from cash flowing, thus causing the lender to decline the deal. Also, you will want to add back depreciation and carry forward expenses as well as those are not actual decreases in cash flow for the current year. I hope this helps. I'm a business banker for a major bank.

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โˆ™ 2012-03-21 02:30:34
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Q: Why add back interest expense to calculate debt service ratio?
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Related questions

What is spread ratio?

Spread Ratio: Interest Earned / Interest Expense

How do you calculate debt service coverage ratio of a firm?

Debt Service Coverage Ratio = Interest payable on debt/Net Profit

What is cash coverage ratio?

The cash coverage ratio is useful for determining the amount of cash available to pay for interest, and is expressed as a ratio of the cash available to the amount of interest to be paid.To calculate the cash coverage ratio, take the earnings before interest and taxes (EBIT) from the income statement, add back to it all non-cash expenses included in EBIT (such as depreciation and amortization), and divide by the interest expense. The formula is: Earnings Before Interest and Taxes + Non-Cash Expenses Interest Expense.

How calculate expense-to-sales ratio?

sales to expense ratio should be under 10% of your net sales, on a monthly basis

What is the formula for times interest earned ratio?

Times Interest Earned = Operating Income/ Interest Expense.

What is the formula for calculating interest coverage ratio?

operating income vefore interest and income taxes / annual interest expense

A company's fixed interest expense is 8000 its income before interest expense and income taxes is 32000 Its net income is 9600 The company's times interest earned ratio is?

Formula for times interest earned = earning before interest and tax / interest expense Times interest earned = 32000 / 8000 = 4 times

How do you calculate debt to service ratio?

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.

How do you calculate depth service coverage ratio?


How do you calculate market expense to sales ratio?

Market expense to sales ratio is calculated by dividing selling and administrative expenses by total sales. ------------------------ Khairul Alam Institute of Business Administration University of Dhaka

How do you calculate the cost ratio?

A cost or expense ratio is not that hard to calculate. Basically its the operating expenses divided by the average value of assets under management. Many sites have calculators that make this easy.

How to calculate the burden ratio of bank?

(Non Interest Op Expenditure - Non Interest Income)/ Average Assets

How do you find the earnings before interest?

Earnings before Interest and Taxes / Interest Expense-indicates how comfortably the company can handle its interest payments. In general, a higher interest coverage ratio means that the small business is able to take on additional debt. This ratio is closely examined by bankers and other creditors.

What is the formula of burden coverage?

Burden Coverage Ratio = EBIT/Interest Expense+[Principal Payment*(1-Tax Rate)

How to calculate Historical debt service coverage ratio?

Net operating Income/Total debt service Total debt servide-cash reuired to pay out interest as well as principal on a debt Net operating Income/Total debt service Total debt servide-cash reuired to pay out interest as well as principal on a debt

What are the Efficiency ratios formulas for banks?

divide the overhead expense by net interest income plus non interest income. A healthy bank should have an efficiency ratio of under 60%

What is the difference between gross expense ratio and net expense ratio?

Net Expense RatioThe net expense ratio is the expense ratio of the fund after applicable expense waivers or reimbursements. This is the actual expense ratio that investors paid during the fund?s most recent fiscal year. Gross Expense RatioThe gross expense ratio is the fund's total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. Why are these fees waived? In the case of funds with smaller assets, the gross total expense ratios may be much higher than net total expense ratios. This is true because certain fixed costs, such as legal and custodian fees, have a disproportionate impact on the expense ratio of a smaller fund in comparison to a larger fund. Mutual fund families also may choose to waiver fees to make the pricing of a fund more competitive. What types of expenses are included in the gross and net expense ratios? There is no difference in the types of expenses within a gross or net expense ratio. The net expense ratio is simply the gross expense ratio of a fund less any waivers or reimbursements. What caused the need for reporting both the gross expense ratio? Were there abuses of some sort going on? While there are no specific abuses of which we are aware, there is the potential that a fund family can discontinue a fee waiver without a shareholder vote. The NASD thought it was important that investors be aware of the potential gross expense ratio, in addition to the actual net expense ratio that investors paid. Ultimately this will not affect your investments or cause any reason for change. This is more or less a new reporting requirement that is put in place to provide as much objective information regarding a mutual fund as possible. You will still primarily be concerned with the net expense ratio since that is what will determine your real return, but you will begin to notice this additional number being reported on investment materials and online.

How do you calculate general and management ratios and what formula do I use?

Total general and management expenses General and management/Expense ratio = Total expenses

How do you calculate a ratio from a percent?

Formula to calculate the ratio

What is Cash flow to Fixed-Charge Ratio?

cash generate from normal course of business that able to cover the fixed charge such as lease and interest expense

What is the average expense to sales ratio for a sales representative?

The average expense to sales ratio for Pharmaceutical sales representative is around 8 to 12 % in Pakistan

How do you calculate excel sheet in Debt-Service Coverage Ratio - DSCR?

bo bo

What is the difference between interest coverage ratio and debt coverage ratio?

Interest coverage ratio, is net operating income + accrual/ interest That is whether the company can cater for the interest portion.

How do you calculate credit loss ratio?

how do we calculate credit loss ratio in banks financials

Is it true that a ratio is a rate?

No. It can be but need not be. For example, you might calculate the ratio of today's temperature in Celsius and in Fahrenheit and calculate the ratio. That is not a rate.