Debt service coverage compares the money the business generates against the loan payments it has to make. Above 1.0 means the business covers its payments from operations; below means something else is covering them.
Lenders look at this before extending credit, so it is worth knowing your own number before someone else quotes it back to you.
How it is calculated
Earnings available to service debt, divided by the payments due over the same period. Lenders generally start from operating profit with non-cash costs added back — close to EBITDA.
What the number means
Below 1.0 — operations do not cover the payments, and something else is: reserves, new borrowing, or the owner.
At 1.0 — covered exactly, with nothing spare for a bad month.
Above 1.0 — covered with margin. Lenders typically want meaningful headroom rather than a bare pass, because a ratio computed on a good year says little about a poor one.
Why the business should know it first
It decides whether further borrowing is available, and on what terms — see business loans. It also appears as a covenant, where falling below a stated level can make a loan repayable even though every payment was made.
Improving it
Either side of the fraction moves it: raising the earnings, or lowering the payments.
Lowering payments usually means refinancing to a longer term, which improves the ratio and raises total interest paid — see refinancing.
Raising earnings is margin improvement and overhead reduction, and it is the durable version.
Read it against the whole obligation
Every commitment, not the newest loan — see debt schedule.