What does the debt service coverage ratio (DSCR) measure?

The debt service coverage ratio (DSCR) measures the ability of an entity, such as an individual or a business, to use its operating income to cover its debt obligations, primarily loan repayments. Specifically, it compares the cash available for debt servicing—meaning the income generated by operations that can be used to pay interest and principal on outstanding debts—against the total debt service costs over a specific period.

A higher DSCR indicates that the entity generates more than enough income to cover its debt obligations, while a ratio below 1 suggests that it may struggle to meet those obligations, which is a critical factor for lenders assessing creditworthiness. This measurement is vital for determining financial stability and the likelihood of timely debt repayment.

The other options pertain to different financial metrics that do not specifically gauge the relationship between cash flow and debt servicing capability. For instance, the ratio of income to loan amount would illustrate leverage but not cash flow adequacy, while the ratio of expenses to income focuses on operational efficiency instead of debt management. The equity-to-debt ratio relates to overall leverage rather than the specific capacity to cover debt service costs.