What is the significance of debt service coverage ratio ?

Financial institutions provide term loans to organizations. The debt service coverage ratio ("DSCR") is an important tool for assessing the financial health of an organization. It also helps in estimating capability to repay existing debt. DSCR assists lenders and investors in determining whether it is safe for the organization to take on additional debt financing. The DSCR is calculated for financial institutions for the period during which term loan of the project is repayable. Normally financial institutions regard a DSCR of 1.5 to 2.0 as satisfactory. DSCR = (Profit After Tax + Depreciation + Other Non- Cash Charges + Interest on term loan + Lease Rentals) / (Interest on term loans + Lease rentals + Repayment of term loans)