Covering interest does not mean you can repay principal.
Debt service includes both interest and principal payments. This page explicitly uses EBITDA divided by scheduled principal plus interest as its DSCR convention. EBITDA is an earnings proxy and can materially exceed cash available after tax, capital expenditure and working-capital needs.
Interest coverage uses EBIT, derived here by subtracting depreciation and amortization from EBITDA, and divides it by interest alone. Comparing the two ratios makes the additional burden of principal visible. Loan documents may define either numerator or permitted adjustments differently.
The formula, made clear.
- DSCR convention
- EBITDA-based company coverage, not property NOI or project-finance CFADS.
- Interest coverage
- EBIT relative to interest only; principal is absent from its denominator.
- Undefined ratio
- A zero denominator has no finite coverage ratio, including a zero-over-zero scenario.
Put the numbers in context.
$600,000.00 EBITDA with $100,000.00 interest and $300,000.00 principal gives 1.5× DSCR. After $100,000.00 D&A, EBIT is $500,000.00 and interest coverage is 5×.
| Input | Example value |
|---|---|
| Period EBITDA | $600,000.00 |
| Period depreciation and amortization | $100,000.00 |
| Period interest expense / cash interest | $100,000.00 |
| Scheduled principal due in the period | $300,000.00 |
| EBITDA debt-service coverage | 1.5× |
What this calculation assumes
All inputs cover the same reporting or forecast period and debt scope. Interest expense is assumed equal to cash interest; accrued/PIK interest requires reconciliation outside this model. No lease, covenant, tax, capex or working-capital adjustment is inferred. Negative earnings produce negative coverage, not an input error. No universal acceptable lender threshold or borrowing approval is supplied.
Methodology references
What to consider next.
Reconcile earnings to actual cash available for debt service before assessing an affordable payment. Review the debt maturity schedule rather than relying on annual averages.
How we approach financial models →