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When the interest coverage ratio is smaller than one, the company is not generating enough cash from its operations EBIT to meet its interest obligations. The company would then have to either use cash on hand to make up the difference or borrow funds. Typically, it is a warning sign when interest coverage falls below 2.5x.
For example, the Corporate Finance Institute (CFI) outlines the DSCR formula using EBITDA — short for earnings before interest, taxes, depreciation and amortization — in place of net operating ...
The debt service coverage ratio (DSCR), also known as "debt coverage ratio" (DCR), is a financial metric used to assess an entity's ability to generate enough cash to cover its debt service obligations, such as interest, principal, and lease payments. The DSCR is calculated by dividing the operating income by the total amount of debt service due.
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Coverage ratio may refer to Building coverage ratio, related to floor area ratio; Debt service coverage ratio; Interest coverage ratio This page was last edited on 6 ...
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It is also used in conjunction with the debt-coverage ratio that many commercial bankers use. The mortgage constant is commonly denoted as Rm. The Rm is higher than the interest rate for an amortizing loan because the Rm includes consideration of the principal as well as the interest.
Interest coverage ratio is used to determine how effectively a company can pay the interest charged on its debt.