How to Calculate DSCR Step by Step: NOI, EBITDA and Global DSCR

DSCR = Cash flow available for debt service ÷ Total debt service, where total debt service is the scheduled principal plus interest due over the same period. For an operating company the numerator usually starts from EBITDA. For an income-producing property it is net operating income (NOI). A DSCR of 1.25x means the business generated $1.25 of cash flow for every $1.00 of debt payments; below 1.00x, cash flow did not cover the payments. To calculate it: confirm the definition in your loan agreement, build the numerator, build the debt service schedule, divide, compare the result with the covenant, and, if the lender requires it, repeat the calculation on a global basis.

This post walks through those steps with the arithmetic shown. For the background on what DSCR means and how to improve it, start with DSCR Ratio: What It Is and How to Calculate. To skip the arithmetic on your own numbers, use the DSCR calculator.

The Formula and Its Two Common Versions

Operating company: DSCR = (EBITDA − adjustments) ÷ (Principal + Interest)

Income property: DSCR = NOI ÷ Annual debt service

The EBITDA version is the standard for commercial and industrial loans to operating businesses. The SBA's lending rules for 7(a) and 504 loans, in SOP 50 10, define operating cash flow as EBITDA and debt service coverage as operating cash flow divided by debt service, with lenders allowed to make specified additions and subtractions. The Corporate Finance Institute's DSCR guide uses EBITDA in the numerator and explains why: EBITDA is not cash flow, but it is a widely used proxy for it, and interest is added back because it already sits in the denominator.

The NOI version is the standard for commercial real estate. The OCC's Comptroller's Handbook on Commercial Real Estate Lending defines DSCR as NOI divided by annual debt service requirements. NOI is property revenue less vacancy and operating expenses, before debt service, depreciation and income taxes.

Most credit agreements for PE-backed and lender-financed companies use a stricter EBITDA-based version, often called a fixed charge coverage ratio, that subtracts unfinanced capital expenditures, cash taxes and distributions from the numerator. The steps below use that version, because it is the one most likely to be tested.

Step 1: Find the Definition in Your Credit Agreement

Before you calculate anything, open the credit agreement and find the defined terms. Look for "Debt Service Coverage Ratio" or "Fixed Charge Coverage Ratio," then follow every capitalized term it uses: Consolidated EBITDA, Unfinanced Capital Expenditures, Scheduled Principal Payments, Restricted Payments. The definition in the agreement is the one the lender tests, whatever a textbook says.

Note four things: the add-backs allowed to EBITDA (and any caps on them), what is subtracted from the numerator, whether debt service includes revolver interest and capital lease payments, and the test period, usually trailing twelve months tested quarterly.

Step 2: Build the Numerator

The worked example uses illustrative figures for a mid-market manufacturer over a trailing twelve-month period. They are assumptions, not data from a real company.

Check: 2,100,000 + 850,000 + 600,000 + 1,150,000 = 4,700,000. Then 4,700,000 − 900,000 − 550,000 = 3,250,000.

Note that income tax expense on the P&L ($600,000) and cash taxes paid ($550,000) are different numbers. Add back the first to get EBITDA; subtract the second to get to cash. Using the expense figure for both is a common error.

Step 3: Build the Debt Service Schedule

Debt service is every scheduled payment of principal and interest due in the test period, taken from the loan amortization schedules, not from the cash flow statement.

Check: 1,400,000 + 300,000 + 850,000 = 2,550,000.

Leave out voluntary prepayments and the repayment of revolver balances unless the agreement says otherwise; they are not scheduled. Include principal. Interest alone is interest coverage, a different ratio.

Step 4: Divide

Same company, same debt. The simple EBITDA version says the business covers its payments 1.84 times. The covenant version says 1.27 times. The difference is $1.45M of capex and cash taxes, which are real cash outflows the lender wants covered before debt service.

Step 5: Compare with the Covenant and Measure the Headroom

Suppose the covenant requires a minimum of 1.25x on the fixed charge basis. The company passes at 1.27x. The ratio alone hides how close that is, so convert it to dollars.

Cash flow needed to pass = 1.25 × 2,550,000 = $3,187,500

Headroom = 3,250,000 − 3,187,500 = $62,500

$62,500 is about 1.3% of EBITDA. Any combination of lower EBITDA and higher capex or cash taxes that adds up to more than $62,500 would put the company in breach. A DSCR that passes by two hundredths of a turn is a covenant at risk, and the conversation with the lender goes better when it happens before the quarter closes. The covenant headroom calculator runs this conversion for each covenant you report.

Step 6: Run Global DSCR When the Lender Requires It

Global DSCR combines the cash flows and debt service of related entities and, for owner-guaranteed loans, the guarantors. The OCC's CRE handbook says cash flows should be assessed on a global basis, integrating business financial statements, tax returns and K-1s across related entities, and considering both required and discretionary cash flows. The SBA's SOP 50 10 requires global debt service coverage of at least 1:1 alongside the business-level test.

A common mid-market structure is an operating company (OpCo) that leases its plant from a related real estate entity (PropCo). Continue the illustrative example, and give PropCo its own NOI calculation.

Check: 1,800,000 × 5% = 90,000. 1,800,000 − 90,000 = 1,710,000. 1,710,000 − 610,000 = 1,100,000. 1,100,000 ÷ 880,000 = 1.25x.

Now combine:

Check: 3,250,000 + 1,100,000 = 4,350,000. 2,550,000 + 880,000 = 3,430,000. 4,350,000 ÷ 3,430,000 = 1.268, or 1.27x.

The intercompany rent is an expense in OpCo's numbers and income in PropCo's, so combining the two entities' cash flows counts it once. What you must not do is add the rent back to OpCo and also count it in PropCo's NOI. Remove other intercompany flows the same way: management fees, intercompany loans and distributions from one entity to the other. If an individual guarantor is part of the analysis, add their personal income and subtract living expenses and personal debt payments, and do it with realistic figures. The OCC handbook calls for realistic projections of personal debt payments, taxes and living expenses.

Global DSCR matters most when one entity is weak. If PropCo lost a third-party tenant and its NOI fell below its mortgage payment, OpCo's cash flow would be what keeps the combined group current, and the lender wants to see that before it happens.

Typical Lender Minimums

Minimums depend on the lender, the loan type and the borrower's risk. These are the published reference points:

The SBA figures are regulatory floors for a guaranteed loan. A bank lending $20M to a PE-backed manufacturer sets its own covenant level. Mid-market credit agreements are negotiated, and the covenant level usually reflects the sponsor's leverage and the lender's view of earnings stability. Read your own agreement; the number in it is the only one that is tested.

Common Calculation Errors

Using interest only. Leaving principal out of debt service produces an interest coverage ratio, which will always look better than DSCR.

Using the wrong period. Most covenants test the trailing twelve months. A single strong quarter annualized is not the tested number.

Mixing book and cash taxes. Add back tax expense to reach EBITDA; subtract cash taxes paid to reach cash flow.

Taking add-backs the agreement does not allow. Credit agreements often cap pro forma adjustments and one-time add-backs. An add-back over the cap is a calculation error the lender will catch.

Ignoring scheduled step-ups. If amortization increases next year, next year's DSCR falls even with flat earnings. Run the forward calculation in your 13-week cash forecast and in the annual plan.

Calculating once a quarter. By the time the compliance certificate is due, the quarter is over. Calculate DSCR monthly on a trailing basis so you see the trend before the lender does. Our post on debt covenant compliance covers how to set up that monitoring.

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