The debt-service coverage ratio is a widely used indicator of a company's financial health, especially those who are highly leveraged with debt. Debt service refers to the cash needed to pay the required principal and interest of a loan during a given period. The ratio compares a company's total debt obligations to its operating income.
Does ABC have a good debt-service coverage ratio?
So if ABC’s principal and interest payments for the year total $2 million, its debt-service coverage ratio would be 5 ($10 million in income divided by $2 million in debt service). Because of that relatively high ratio, ABC is in a good position to take on more debt if it wishes to do so. What is a good debt-service coverage ratio?
What are coverage measures & how do you use them?
Coverage measures are never taken in isolation when analyzing a company; they’re always used in conjunction with other categories of credit metrics like leverage (Debt-to-Equity, Funded Debt-to-EBITDA, etc.) and liquidity (Current Ratio & Quick Ratio)
