Debt Sizing: DSCR, Interest Coverage and Debt/EBITDA

Three ratios answer different questions

Debt/EBITDA compares a debt stock with annual earnings. Interest coverage compares an earnings or cash-flow measure with interest. DSCR compares cash available for debt service with the contractual debt service due in that period. Definitions differ by lender.

Debt / EBITDA = Defined debt balance / EBITDA
EBITDA interest coverage = EBITDA / cash interest
DSCR = Cash available for debt service / (cash interest + scheduled principal)

Worked example: one strong ratio can hide another weak one

A business has $10m EBITDA, $40m debt, $3m cash interest, $4m mandatory principal and $8m cash available for debt service. Leverage is 4.0x and EBITDA interest coverage is 3.33x, but DSCR is only $8m / $7m = 1.14x.

Under an illustrative 1.25x DSCR requirement, maximum debt service is $8m / 1.25 = $6.4m. Actual scheduled service of $7m fails that requirement even though interest coverage looks comfortable. This threshold is illustrative, not a universal lending standard.

Size debt under multiple limits

A leverage cap gives one candidate debt amount. Cash-flow coverage and amortization give another. Use the binding constraint and test every forecast year, not just the entry year. Changing debt also changes interest and cash sweep, so re-run the schedule rather than applying a static ratio to entry EBITDA.

Define the denominator carefully

Do not interchange EBITDA, EBIT, UFCF and cash available for debt service. Adjustments for leases, maintenance capital expenditure, restricted cash, taxes and exceptional costs may matter. If debt service is zero, display the ratio as not meaningful rather than dividing by zero.

Use the credit outputs in diophos

Review leverage, interest coverage and DSCR alongside the modeled debt schedule and cash balance. An output can satisfy a modeled limit while missing a covenant definition in the actual loan agreement. Downside cases should include weaker earnings, higher interest rates and limited refinancing access.