← Business Metric: Financial (all topics)
Interest coverage & DSCR
What it is
Interest coverage is operating profit divided by interest expense. Debt service coverage goes further, comparing cash available against interest plus mandatory principal repayment
Coverage tests solvency in flow terms, where leverage ratios test it in stock terms
Impact on industries
- Measures the actual ability to service debt from operations, which is what determines default rather than the debt level itself
- Debt service coverage is the stricter test and the one lenders enforce through covenants, since it includes principal
- Both deteriorate quickly when rates rise on floating-rate debt, even if the business is performing exactly as before
- For lease-heavy businesses the fixed charge cover ratio is the better test, since rent behaves like debt service