Financial Glossary
Debt Service Coverage Ratio
The Debt Service Coverage Ratio (DSCR) measures a property's or company's ability to meet its debt obligations from operating income. The formula is: DSCR = Net Operating Income divided by Total Debt Service, where Total Debt Service equals all principal and interest payments due in the period. A DSCR of 1.0 means income exactly covers payments; above 1.0 means a surplus; below 1.0 signals a shortfall. Most commercial lenders require a minimum DSCR -- commonly 1.20 to 1.35 -- before approving a loan, and covenant violations triggered by DSCR falling below a threshold can accelerate repayment.
Problem & Application
A campground generates $420,000 in annual net operating income. Its mortgage and equipment loan require combined payments of $300,000 per year. DSCR = $420,000 divided by $300,000 = 1.40, comfortably above a typical lender minimum of 1.25. If a slow season drops NOI to $280,000, DSCR falls to 0.93 -- a covenant breach that could trigger a default or require the owner to inject cash. Parikh Financial monitors DSCR monthly for STR and campground clients, flagging periods where seasonal revenue dips threaten covenant compliance. Proactive modeling allows operators to build cash reserves during peak season specifically sized to buffer the off-season DSCR, avoiding lender conversations that arise from surprise shortfalls.
In Short
Maintaining a healthy DSCR is crucial for securing financing and ensuring long-term financial stability. Companies should optimize revenue and manage debt obligations.