Service Coverage Ratio

There are some concerns when relying on the TIE ratio. Companies have other debts to pay beyond paying interest payments, such as loan principal and bond payments. In addition, EBIT does not coincide with cash flow. Revenue may have been earned and recognized thus increasing EBIT, but the company may not have collected any cash yet. Even though, cash is needed to pay debts and interest. Considering these concerns, an alternative ratio to consider is the debt service coverage ratio. 

Debt service coverage ratio = Cash flow from operations before 

This ratio provides insight into whether or not the cash generated by the company s operations is sufficient to repay interest, principal, and other debt obligations. Other debt obligations may include early retirement of debt and lease payments. The information to complete this ratio comes from the statement of cash flows. As this ratio is regularly changed to fit the user s particular circumstance, you may find still that EBIT or a whole host of other variables are used in the numerator, but still we include all debt obligations in the denominator. 

Companies and management are evaluated on many outcomes and operations functions can directly impact a company s financial performance. Companies are evaluated on their ability to pay current bills, profitability, management of assets and debts, and the valuation of the company. Operations and supply chain managers have a significant impact on a company s cash flow, profitability, debt burden, utilization of assets, and its ability to remain in business. Operational decisions and actions will be reflected on a company s financial statements and subsequent performance ratios. Table 4.5 provides a summary of the performance ratios that were introduced in this chapter. 

Current ratio Current assets/Current liabflities = 22,203/ 17,839 = 1.24 times 

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XYZ Securities will construct a cash flow model to estimate the size of the issued notes. The model will consider historical sales values, any seasonal factors in sales, credit card cash flows, and so on. Certain assumptions will be made when constructing the model, for example, growth projections, inflation levels, tax levels, and so on. The model will consider a number of different scenarios, and also calculate the minimum asset coverage levels required to service the issued debt. A key indicator in the model will be the debt service coverage ratio (DSCR). The more conservative the DSCR, the more comfort there will be for investors in the notes. For a residential mortgage deal, this ratio might be approximately... 

The other notable difference between RMBS and CMBS is that the CMBS is a non-recourse loan to the issuer as it is fully secured by the underlying property asset. Consequently, the debt service coverage ratio (DSCR) becomes crucial to evaluating credit risk. 

Debt Service Coverage Ratio (DSCR) = Net Operating Income / Debt Payments and so indicates a borrower s ability to repay a loan with a DSCR of less than 1.0, meaning that there is insufficient cash flow generated by the property to cover required debt payments. 

Debt Service Coverage Ratio (DSCR) Net Operating Income/ Debt Payments commercial mortgages... 

Long-term debt-sendee coverage is defined as the ratio of cash generation to debt service, and acceptable... 

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