DSCR (Debt Service Coverage Ratio)
Private Equity glossary · Advanced LBO Modeling Mechanics & Deal Structuring
Definition
CFADS divided by debt service; typical covenant >1.2–1.5x.
DSCR (Debt Service Coverage Ratio) in plain English
When a company borrows money, it owes regular loan payments — that's 'debt service.' DSCR checks whether the cash the business actually generates is enough to cover those payments, by dividing the cash available by the payment owed. A DSCR of 1.0x means the company makes exactly enough to pay the loan with nothing to spare — nerve-wracking — so lenders usually demand a cushion, writing rules (covenants) that require it stay above roughly 1.2–1.5x. It's like a bank checking that your monthly paycheck comfortably clears your rent with room left over, not that it just barely squeaks by. (CFADS, the top number, is simply the cash the business has on hand to make those debt payments.)
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