Which statement correctly defines the debt service coverage ratio (DSCR)?

• A. Debt service divided by operating income
• B. EBIT divided by debt service
• C. Net income divided by total debt
• D. Operating income divided by debt service

Answer: (D)

Debt service coverage ratio shows how well the income from ongoing operations can cover the fixed yearly debt payments. It compares the money a business generates from its core operations (operating income) to the debt service due in the same period (principal plus interest). By dividing operating income by debt service, you get how many times over those debt payments could be paid from current operations. A result above 1 indicates a cushion, meaning there’s enough operating income to cover the payments; exactly 1 means the income just covers the payments; below 1 signals a shortfall and potential risk. This measure focuses on cash-generating ability from ongoing work rather than profits after taxes or financing, which is why the ratio uses operating income. The other formulations either invert the ratio or replace operating income with net income or other measures that include non-operating items or taxes, which can misrepresent the true ability to service debt.