How is DSCR calculated and what is a typical acceptable threshold?

• A. DSCR = cash available for debt service / scheduled debt service; threshold commonly ≥ 1.20x to 1.25x.
• B. DSCR = net income / total assets; threshold commonly ≥ 2.0x.
• C. DSCR = gross revenue / total debt; threshold commonly ≥ 0.8x.
• D. DSCR = cash flow after taxes / depreciation; threshold commonly ≥ 1.0x.

Answer: (A)

DSCR measures whether a project generates enough cash to cover its debt payments. It compares the cash that’s available to service debt with the actual debt service due during the period. The typical measure of cash available for debt service is the cash flow from operations that can be used to pay debt, while debt service is the scheduled principal and interest payments.

A DSCR above 1.0 means there’s more cash than required to meet debt obligations, and lenders often look for a cushion. In practice, a threshold around 1.20 to 1.25x is common, signaling about a 20–25% buffer above debt service to absorb uncertainties like vacancies or lower-than-expected cash flow.

For example, if the cash available for debt service is $1.5 million and the annual debt service is $1.0 million, the DSCR is 1.5x, comfortably meeting the typical threshold. If cash available were only $900,000 against $1,000,000 in debt service, the DSCR would be 0.9x, indicating insufficient cash flow to cover payments.

Using net income or total assets, or mixing up revenue with debt service, doesn’t reflect the actual ability to pay debt, which is why those formulations aren’t correct. Depreciation and other non-cash items don’t represent cash available to make debt payments, so they’re not used in the numerator.