Average DSCR

How to calculate average DSCR(Debt Service coverage ratio)

There are two ways to calculate ADSCR

1.   Take average of each year DSCR (Cash flow available for Debt servicing(PAT+ Depreciation + Interest + Deferred Tax + Lease Rental income)/ (Interest payment in year + Principal repayment in the year)
2. Divide the total Cash flow available for Debt servicing over the life of the loan by sum  total Interest payment and Total Principal repayment)

The first method give equal importance to each period but second method treats each element by the relative importance of the sum of principal and interest

Both method with give same result if denominator is same for all year i.e. / (Interest payment in year + Principal repayment in the year) but result will be different in case of differential repayment

So it is all preferable to calculate ADSCR using second method as

1. It does not treats all period as equally important
2. It does not cover the distortions due to differential repayment
3. It is more accurate representation of average