A financial ratio that measures how easily a borrower can pay interest and make scheduled amortization payments on its outstanding debt as those amounts become due. Higher ratios (greater than 1:1) indicate a company has sufficient cash flows to cover its debt service obligations. This may be structured as the ratio of a company's net operating income to its scheduled debt payments of principal and interest, though lenders often use EBITDA in place of net operating income in loan agreements that include a DSCR.

The DSCR is similar to the fixed charge coverage ratio in that, at a minimum, it measures how easily a borrower can pay interest and scheduled amortization payments on its outstanding debt. However, the definition of fixed charges often includes things in addition to debt service, such as distributions to equity holders, taxes paid in cash, rent payments, and unfinanced capital expenditures.

In the context of project finance, the DSCR measures a project owner's ability to pay the project debt from revenue generated by the project. The higher the DSCR, the less likely it is that the project owner will default on the loans it incurred to finance construction of the project. Project lenders typically prefer a DSCR of about 1.3:1, but this ratio may range from 1.1:1 for lower risk projects (for example, a fully contracted project with a creditworthy offtaker to 2.0:1 for the riskiest projects. In these transactions, the DSCR may be calculated on a monthly, semiannual, or annual basis, depending on the loan payment dates. For more information on the sizing of this ratio and how it is used in project finance transactions, see , Practice Note, Financial Covenants: Project Finance Transactions: Debt Service Coverage Ratio (DSCR).