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Debt Coverage Ratio

 

Debt coverage ratio (debt service coverage ratio) is a ratio that measures solvency risk and mostly is applied for property projects. There are many debt coverage ratios that are used in financial practice on this purpose. Each of those ratios tries to measure company’s ability to repay its debts. Some coverage ratios compare particular type of earnings to interest expenses while other compares it to the debt of the company. In either way these financial ratios should help to determine the solvency risk level of a business. 

 

'Debt service coverage ratio' is mostly applied in real estate finance. In can also be applied in corporate finance but it will not have much meaning while debt principal payments are just a matter of structuring, and such ratio can be hardly comparable. Yet, it still can be useful for real estate projects while those usually have long-term financing which is repaid by equal payments each month. 

 

Debt coverage ratio formula 


Debt coverage ratio = Operating profit / Total annual debt service

 

* Total annual debt service includes interest paid annually and annual principal payment and should be equal to annual mortgage payment in a case of a real estate project analysis. 

 






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