Learn about the Debt Service Ratio, what it measures & ideal DSR in our comprehensive knowledge base article.
The Debt Service Ratio (DSR) is a financial ratio that measures a company's ability to repay its debt obligations. It indicates the proportion of a company's cash flow that is dedicated to repaying its debts.
The formula for Debt Service Ratio is:
Debt Service Ratio (DSR) = Annual Debt Repayments / Annual Net Operating Income
Where Annual Debt Repayments is the amount a company is obligated to pay towards its debts in a given year and Annual Net Operating Income is the amount of income a company generates after deducting its operating expenses.
A general rule of thumb for the Debt Service Ratio is that a lower DSR is better, as it indicates that a company has a larger proportion of its cash flow available for other purposes. A DSR of 1 or lower is considered safe, meaning that a company has enough cash flow to cover its debt payments. A DSR greater than 1 may indicate that a company is having difficulty repaying its debts and may be at risk of default. However, the acceptable range of DSR can vary depending on the industry and the company's financial history.